By Sam Brunson
It’s not even an election year, but the last couple weeks have been exciting for tax policy fans. First was Rep. Alexandria Ocasio-Cortez inserting the idea of a 70% top marginal rate into the public conversation. Then today, Sen. Elizabeth Warren proposed a wealth tax on taxpayers with household wealth in excess of $50 million. While she hasn’t released details, and the news reports aren’t completely clear, I’m assuming that households would pay 2% of their net worth in excess of $50 million, and an additional 1% on their wealth in excess of $1 billion.[fn1]
Can the government do that? Maybe, but probably not with a traditional wealth tax.
The constitutional impediment the government would face is the Taxing Clause of the Constitution. Art. 1, sec. 9, cl. 4 of the Constitution says:
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.
What constitutes a direct tax? Honestly, that was unclear from basically the day the Constitution was written. In fact, for the first hundred years of the Constitution, the Supreme Court read this limitation remarkably narrowly. It basically said that direct taxes were just poll taxes and taxes on land. Then, in 1895’s Pollock decision, the Supreme Court expanded the definition of “direct tax” to include taxes on personal property and on income from personal property. Because of the 16th Amendment, it no longer matters whether an income tax is a direct tax. As recently as 2012, though, the Supreme Court reiterated (in NFIB v. Sebelius) that the definition of “direct tax” still includes taxes on personal property.[fn2]
Because an individual’s wealth is made up of real and personal property, then, a wealth tax would almost certainly be a direct tax.
Now Congress isn’t forbidden from imposing direct taxes—it could impose, for instance, a real property tax if it wanted to. But if it imposes a direct tax, it has to apportion the tax according to the various states’ populations.
And what does that mean? Let’s look at a radically simplified example. Sen. Warren estimates that her wealth tax would raise $2.75 trillion over 10 years. So let’s say it’s slated to raise $275 billion this year.
Under the last census, the U.S. had a population of about 309 million people. California had 37 million residents, New York had 19 million, and Nebraska had 1.8 million. Converted to percentages, California had 12% of the population, New York had 6%, and Nebraska had 0.6%. Apportioning the tax, then, California residents would have to pay $33 billion in wealth tax, New York residents $16.5 billion, and Nebraska residents $1.65 billion.
The problem is, it’s unlikely that the states have a proportionate number of 50-millionaires and billionaires. And here I’m going to have to simplify Sen. Warren’s proposal, because it’s not easy to find the number of people per state with wealth of $50 million or more. So I’m going to pretend the tax only applies to billionaires, because Wikipedia has a list, divided by state. According to its list, there are 124 billionaires in California, 93 in New York, and 2 in Nebraska. So each California billionaire would have to pay $266 million, each New York billionaire would have to pay $177 million, and each Nebraska billionaire would have to pay $825 million.[fn3]
This illustrates a couple problems with apportioning the tax. First, it’s wildly inequitable. Billionaires in Nebraska would pay a lot more than billionaires in New York. Second, it’s impossible to impose the wealth tax at a 2- or 3-percent rate. Apportionment ruins that.
Now, that’s not to say there’s no way to tax wealth at the federal level. You could certainly just apportion it according to population, horizontal equity notwithstanding.
Alternatively, you could go the 16th Amendment route: it’s tough to amend the Constitution, but with enough support, you could amend it to eliminate the Taxing Clause’s apportionment requirement on direct taxation.
Or you could use an income tax to approximate wealth taxation. Ari Glogower, for instance, suggests three ways that we could use wealth to affect the amount of income taxes high-net-worth taxpayers pay that, as income taxes, wouldn’t raise the constitutional requirements of direct taxation.[fn4] I’ve also heard people suggest using mark-to-market to approximate a wealth tax through the guise of an income tax.
Wherever this goes, the question of federal wealth taxation is one that will be hard, even beyond the politics. But, at the same time, it’s a fascinating discussion, and I look forward to even more tax proposals and more fascinating discussions as we approach 2020.
[fn1] It’s possible that she means that any household with net worth in excess of $50 million would pay a 2% tax on their full wealth, and that anybody with wealth in excess of $1 billion would pay 3% of their full net worth. That would introduce the kind of cliff effect that progressive marginal rates are designed to avoid in the income tax, though, and given the work Rep. Ocasio-Cortez has done to educate Americans about the difference between marginal and effective rates, I can’t imagine Sen. Warren would disregard that discussion (notwithstanding that it dealt with income, not wealth, taxation).
[fn2] I go through this history in my article Paying for Gun Violence, if you’re interested in a little more detail.
[fn3] And I get that the actual number would be significantly lower, because I’m leaving out a huge chunk of the potential wealth taxpayers. But this illustrates the problem.
[fn4] Thanks to Ellen Aprill for sending me a link to Ari’s paper!