The US Wealth Tax's Pressing Constitutional Question

Supporters of a U.S. tax on large accumulations of wealth are looking to bolster the case that it would pass constitutional scrutiny, amid concerns that such a measure could be blocked by the restrictions on direct taxes.

Letters to Sen. Elizabeth Warren, D-Mass., from 14 law professors affirmed that wealth tax legislation she introduced last week would be constitutional as currently written. While the Constitution effectively bars Congress from enacting any direct taxes other than an income tax, these experts argue that this limitation should be read narrowly, applying to forms of taxation used at the time of the nation's founding.

Critics say this interpretation contradicts not only a plain reading of the language, but also prior Supreme Court decisions.

It's not just an academic legal debate. As lawmakers look for ways to raise revenue after passing several trillion-dollar relief bills, a wealth tax has emerged as a popular, if controversial, choice. But many will be wary of seriously considering a wealth tax if they doubt that courts would let it stand.

"If I were a member of Congress, and I were made aware that there is at least a serious possibility that there's a constitutional problem, I would be very nervous about voting in favor of that legislation," said Erik Jensen, a professor emeritus of law at Case Western Reserve University.

'Two Cents'

Warren's legislation, the Ultra-Millionaire Tax Act, would levy an annual 2% tax on the net worth of households or trusts worth $50 million or more. The tax would increase to 3% for those with $1 billion or more in net worth, and the top rate would double to 6% if Congress also enacted universal health care coverage. According to Warren's office, the tax would raise at least $3 trillion over the next 10 years, although other experts claim the figure could be lower.

While the single-digit percentage rates may seem miniscule, over time they would amount to a substantial hit to eligible taxpayers. According to an analysis by Gabriel Zucman and Emmanuel Saez of the University of California, Berkeley, had the tax been in place in 1982, the fortunes of the country's 10 richest billionaires would have been at least 40% lower in 2018. Financier Warren Buffett, for instance, would have been worth $14.5 billion, instead of $88.3 billion in reality.

The proposal was a centerpiece of Warren's campaign for the presidency, with "Two Cents" becoming a common refrain at rallies. With anger at the ultra-rich and inequality at a fever pitch, it helped Warren briefly run ahead of her rivals for the Democratic presidential nomination.

Since then, the novel coronavirus pandemic has heightened interest in the tax even further. Billionaires have seen their net worth rise by 40%, according to Warren's office, making it clear that accumulated wealth should be a key source for revenue to fund the country's recovery.

But the idea is also controversial. Critics claim it could be an administrative nightmare for the Internal Revenue Service to price valuable assets around the country every year. It could also lead to an outflux of capital and heightened tax evasion, opponents argue, noting that European countries repealed similar taxes after finding them difficult to enforce.

State Apportionment

The constitutional question may be the proposal's biggest hurdle. Article 1, Section 9 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."

Apportionment by state population would require that Congress adjust rates to ensure that each state raises an amount proportional to its population, regardless of wealth or economic activity. At the time of the founding, direct taxes mainly applied to land, especially plantations in the Southern slave states.

Over time, courts have gradually broadened the category to include taxes on all types of property. In the 1895 case Pollock v. Farmers' Loan & Trust Co. , the Supreme Court struck down a federal income tax that was not apportioned by state population, claiming that income derived from property was a direct tax. The decision led to the passage of the 16th Amendment , which authorized Congress to pass a federal income tax without apportionment.

Under the reasoning in Pollock, a wealth tax would almost certainly be barred. After all, it directly taxes all types of property.

An Unclear Definition

But many legal experts argue that Pollock was a misstep, and that the constitutional language ought to be read in a much narrower way.

"The apportionment rule is not, and was never intended to be, a major barrier to Congress' taxing power," stated a Feb. 25 letter signed by nine law professors, including Ari Glogower of Ohio State University's Moritz College of Law and David Gamage of Indiana University, Bloomington's Maurer School of Law. "The apportionment rule occupies a peripheral role in the constitutional structure and resulted from an intentionally ambiguous compromise over representation and slavery."

The writers argued that other legal precedents, aside from Pollock, indicate that the Supreme Court should give Congress wide leeway to enact different kinds of taxes.

"The court could rule that a tax on an individual's total net wealth is qualitatively and constitutionally different from a tax on land alone, or that a tax on large wealth holdings is a tax on the activity of accumulating and maintaining concentrated wealth," they wrote.

Their reasoning was backed by a second letter, signed March 1 by five law professors including Laurence Tribe of Harvard University and Bruce Ackerman of Yale University. Warren's office released both letters along with the legislation on March 1.

The issue boils down to the words "direct tax." Without a clear definition in the Constitution, lawyers must either make their own assumptions or draw from other contemporaneous sources.

"There is no objectively 'correct' definition of what a direct tax encompasses," Glogower wrote in an email to Law360. "The historical record suggests that the framers did not share a common understanding or agreement on the direct tax definition, and this ambiguity in fact aided negotiations over questions of representation and slavery."

Legal Perils

Many other legal scholars, however, remain skeptical that a direct tax should apply so narrowly.

"It seems to me that land was the clearest measure of wealth at the time," said Jensen of Case Western. "I don't know why we would ever interpret a constitutional limitation on power to apply only to things that were known in 1789."

And while other court decisions have narrowed Pollock's precedent, Jensen noted that current Chief Justice John Roberts confirmed in the 2012 case National Federation of Independent Business v. Sebelius , which affirmed the Affordable Care Act , that a direct tax is a tax on property. So long as he is on the bench, a wealth tax may face a harsh audience.

"The Supreme Court may very well have erred in Pollock v. Farmers' Loan & Trust Co.," wrote Andy Grewal, a professor of law at the University of Iowa, in a message to Law360. "However, given that holding, it is hard to see how a robust wealth tax could pass constitutional muster under existing doctrine."

While congressional Democrats rally around Warren's proposal, the administration is most likely less inclined to support it. On the campaign trail, Joe Biden opposed the idea, instead advocating for increased capital gains and estate taxes.

Rebecca Kysar, a former law professor at Fordham University School of Law who is now an adviser to the U.S. Treasury Department, co-authored a New York Times op-ed in 2019 with Daniel Hemel of the University of Chicago Law School. In it, they claimed a wealth tax would likely not be constitutional.

"A wealth tax that is struck down by the justices will do nothing to close the wealth gap," they wrote. "It will raise no money to pay for universal health care and child care, greater investments in education or ambitious efforts to halt global warming."

In Europe, without a similar constitutional limitation, the idea has been picking up steam, as nations look for ways to crawl out of the fiscal holes caused by the pandemic.

Saez and Zucman of Berkeley argued in 2020 that a wealth tax could cover the European Union's budget shortfall, and the issue has been debated, along with excess profits taxes and other emergency revenue measures, among EU member states.

--Editing by Robert Rudinger and Neil Cohen.

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