Wealth Tax: Unconstitutional, Says Nate Silver

During the 2020 presidential campaign, Senators Bernie Sanders and Elizabeth Warren proposed a wealth tax on the holdings of the very wealthy. A wealth tax is an annual levy on the net worth or total assets of an individual or household above an exemption threshold. Critics argue that a wealth tax would be difficult to enforce, lead to tax evasion, and may be unconstitutional. The US Constitution bans direct taxes that are not collected evenly across states based on their populations. Some scholars argue that a wealth tax would be an unapportioned direct tax and therefore unconstitutional. However, others argue that the Constitution grants Congress broad taxing powers that allow for a wealth tax, whether it is apportioned or not. The ultimate ruling on the constitutionality of a wealth tax is unclear.

Explore related products

Should Wealth Be Redistributed? (Little Debates about Big Questions)

$31.99 $39.99

Taxing Ourselves, fifth edition: A Citizen's Guide to the Debate over Taxes (Mit Press)

$35 $35

How to Pay Zero Taxes, 2020-2021: Your Guide to Every Tax Break the IRS Allows

$16.9 $24

The IRA and Retirement Plan Owner's Guide to Beating the New Death Tax: 6 Proven Strategies to Protect Your Family from The SECURE Act

$0.99 $24.95

The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS

$9.69 $18.99

Controversies in Tax Law: A Matter of Perspective (Controversies in American Constitutional Law)

$47.11 $54.95

The Sixteenth Amendment allows income taxes but not wealth taxes

The Sixteenth Amendment, or the 16th Amendment, to the US Constitution allows Congress to impose income taxes. However, it does not explicitly address wealth taxes, and there are questions about its applicability to such taxes. The Amendment was introduced in 1913 as a political stunt by a Nebraska senator, and it allowed income taxes to be imposed without being apportioned among the states by population. This change paved the way for future federal income tax regimes and the adoption of income tax "brackets".

The distinction between income and wealth taxes is important. Income taxes are generally considered taxes on earnings or transactions, while wealth taxes are taxes on ownership or possession. Income taxes are levied on wages, salaries, and income from investments, such as capital gains, while wealth taxes are levied on the total assets of an individual or household, including financial and non-financial assets.

Wealth taxes have been proposed by some politicians, such as Senators Bernie Sanders and Elizabeth Warren, as a way to address wealth inequality and raise revenues. However, critics argue that wealth taxes may be unconstitutional due to the Constitution's apportionment rule, which requires certain taxes to be apportioned among the states according to their populations. The interpretation of this rule and its impact on the constitutionality of wealth taxes is a subject of debate among legal scholars.

While the Sixteenth Amendment explicitly allows income taxes, it does not directly address wealth taxes. The absence of a specific amendment permitting wealth taxes suggests that they may be unconstitutional. However, some scholars argue that the Constitution grants Congress broad taxing powers that could include the authority to enact a wealth tax, whether apportioned or not. The interpretation of the Constitution's provisions and the role of the apportionment rule are key factors in this debate.

In summary, the Sixteenth Amendment explicitly allows income taxes but does not address wealth taxes. The constitutionality of wealth taxes is a complex issue that involves interpreting the Constitution's provisions, the role of the apportionment rule, and the scope of Congress's taxing powers. The ultimate ruling on the constitutionality of wealth taxes remains uncertain, and it may ultimately be decided by the Supreme Court.

The Constitution's apportionment rule requires taxes to be apportioned among states by population

The U.S. Constitution allows Congress to "lay and collect Taxes, Duties, Imposts and Excises" with two explicit conditions. Firstly, all duties, imposts, and excises must be "uniform throughout the United States." Secondly, "Capitation, or other direct, Tax [es] shall be...in Proportion to the Census." In other words, all federal taxes must be geographically uniform, but direct taxes must be apportioned.

The Constitution's apportionment rule requires certain taxes to be apportioned among the states according to their populations. Critics of a wealth tax argue that it would be unconstitutional because of this rule. They interpret the rule as a significant limit on Congress's constitutional taxing power.

However, supporters of a wealth tax argue that these critics misinterpret the role of the apportionment rule. They claim that the Constitution grants Congress broad taxing powers that allow for a wealth tax, whether it is apportioned or not. A measured interpretation of the apportionment rule preserves its role in the constitutional structure without inflating it into a fundamental limitation on Congress's taxing power.

The ultimate ruling on the constitutionality of a wealth tax is unclear. While some scholars argue that it would be unconstitutional, others insist that it would be constitutional. The fate of a wealth tax in the United States may ultimately be decided by the Supreme Court.

Wealth taxes involve no transaction, unlike inheritance taxes

The constitutionality of wealth taxes has been a subject of debate, with critics arguing that it could lead to legal and administrative issues, and even unconstitutionality. One key argument against the constitutionality of wealth taxes is the claim that, unlike inheritance taxes, wealth taxes involve no transaction.

Wealth taxes, as proposed by some, would be an annual tax on an individual's or household's net worth, including financial and non-financial assets. This differs from inheritance taxes, which are levied only on the instance of inheritance, typically after the death of the original owner, and following a legal process to facilitate the transfer of assets.

Inheritance taxes are imposed on the beneficiaries of an estate, based on the value of the assets they inherit. While there is no federal inheritance tax in the United States, several states levy such taxes, including Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. These taxes are typically due within several months of the decedent's death.

On the other hand, wealth taxes, as proposed by some politicians, would be an annual levy on an individual's or household's total net worth above a certain threshold. This includes financial assets such as bank accounts, stocks, and real estate. The proposal suggests an additional tax on existing forms of taxation, not as a substitute, with an "exit tax" on assets transferred abroad to curb tax avoidance.

The distinction between wealth taxes and inheritance taxes is significant in the context of constitutionality. Knowlton sets a precedent that taxes on transactions, rather than "ownership or possession," are considered indirect taxes. As Warren's proposal for a wealth tax is not characterized as an indirect tax, it could be deemed unconstitutional under this precedent.

Explore related products

The Myth of American Inequality: How Government Biases Policy Debate (With a New Preface)

$15 $19.95

Capital in the Twenty-First Century

$12.2 $24

Complexity and the Art of Public Policy: Solving Society's Problems from the Bottom Up

$16.37 $26.95

Progress and Poverty, Volumes I and II: Enriched edition. An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth

$1.99 $28.09

Unfree Speech: The Folly of Campaign Finance Reform

$52.25 $55

The Constitution of the United States and The Declaration of Independence

$1.99 $6.95

Wealth tax could lead to tax evasion and a weakened US tax base

The implementation of a wealth tax in the United States has been a topic of debate, with critics arguing that it could lead to tax evasion and a weakened US tax base. While some scholars argue that a wealth tax would be constitutional, others claim that it violates the Constitution's apportionment rule, requiring taxes to be apportioned among states according to population.

Proponents of a wealth tax argue that it would effectively raise revenues and address wealth and income inequality. However, critics predict that it would lead to tax evasion, reducing the amount of revenue collected. They argue that wealthy families would use legal structures to maintain control over their assets while avoiding direct ownership, such as through trusts and nonprofits. Additionally, the flexibility of wealthy families to relocate may drive America's fortunes out of the country, further weakening the US tax base.

The constitutionality of a wealth tax is a complex issue. Some scholars argue that the Framers severely limited Congress's taxing powers, and the Sixteenth Amendment, which allows income taxes, does not apply to wealth taxes. The Supreme Court's ruling in Pollock v. Farmers' Loan & Trust Co. in 1895 also suggests that income taxes are unconstitutional if they are not apportioned among states based on population. However, others interpret the apportionment rule differently, arguing that it does not restrict Congress's ability to enact an unapportioned wealth tax.

The debate over the constitutionality of a wealth tax is ongoing, and it may ultimately be decided by the Supreme Court. While some critics focus on the legal aspects, others suggest that a wealth tax would be impractical due to administrative difficulties, noncompliance, and undesired emigration, as seen in countries that have repealed their wealth tax laws.

In conclusion, the potential consequences of a wealth tax in the United States, including tax evasion and a weakened tax base, are complex and multifaceted. While some argue that it would effectively address inequality, critics highlight the legal and practical challenges that could arise, emphasizing the need for careful consideration and debate before implementing such a significant policy change.

Wealth tax may be difficult to enforce

Critics of wealth tax argue that it would be difficult to enforce. They predict that imposing a wealth tax would lead many wealthy families to use legal structures to abdicate direct ownership of assets while maintaining practical control over them, such as through trusts and nonprofits. Wealthy families also have substantial flexibility in their mobility, so a wealth tax could drive America's fortunes out of the country and weaken the U.S. tax base.

Indeed, a number of economists have projected that a U.S. wealth tax would raise only a fraction of the amount that economists like Saez and Zucman have projected. Instead of a wealth tax, critics argue that the best way to get the rich to pay their fair share of taxes is through reforms to the current income tax system, such as closing tax shelters, changing capital gains laws so that heirs are liable to pay tax on the gains not realized during the benefactor's lifetime, and adjusting the provisions of the estate tax.

Wealth tax critics also argue that a wealth tax would be an unapportioned direct tax and therefore unconstitutional. The U.S. Constitution allows Congress to “lay and collect Taxes, Duties, Imposts and Excises” with two explicit conditions. First, all duties, imposts, and excises “shall be uniform throughout the United States." Second, “Capitation, or other direct, Tax [es] shall be…in Proportion to the Census.” In short, all federal taxes must be geographically uniform, but direct taxes must be apportioned.

The Sixteenth Amendment, which allows income taxes, does not apply to wealth taxes. The argument for income taxes not violating the Fifth Amendment is more general; if income taxes don't violate the Fifth Amendment, then why should a wealth tax? In Eisner v. Macomber (1920), the Supreme Court ruled that a dividend distribution where no actual cash is received is not taxable income under the Sixteenth Amendment. This precedent suggests that wealth held in the form of stocks and other non-cash assets is similarly not taxable.

However, supporters of a wealth tax argue that the Constitution grants Congress broad taxing powers that allow for a wealth tax, whether it is apportioned or not. They argue that the maximalist interpretations misapprehend the role of apportionment in the constitutional structure and improperly elevate a peripheral rule into a major barrier to tax reform.

Frequently asked questions