Sen. Elizabeth Warren (D-MA) has proposed a new wealth tax. We don’t know a lot of details on what is being proposed, but what little we do know suggests there is a constitutional problem. The Washington Post reported yesterday that Warren is being advised by two economists “on a proposal to levy a 2 percent wealth tax on Americans with assets above $50 million, as well as a 3 percent wealth tax on those who have more than $1 billion.”
The problem is that would be considered a “direct tax” under the Constitution, which requires such taxes to be only “in proportion to the census.” Making a tax proportional to population is called “apportionment.” Under modern Supreme Court precedent, direct taxes are taxes on people or the ownership of property. While indirect taxes are taxes on the use of property, such as buying or selling it. If a person does nothing, then they pay no indirect taxes.
It is possible that Warren understands this constitutional problem and therefore plans to have her tax apportioned (but hasn’t said so yet), but this would lead to some rather strange results. The tax would have to be made proportional to the population in each of the states. So imagine if there were two states, State A and State B. Let’s assume that both states have the same population but a large number of rich people are in state A and only a single rich person in state B. That single person in state B would have to pay just as much as all the rich people in state A. So the rich people in poorer states would be taxed more than rich people in rich states. It would also encourage rich people to all move to the same state to reduce their taxes. Also rich people in less-populated states would have to pay less then rich people in more populated states.
One might argue that this isn’t a direct tax and that modern Supreme Court precedent is wrong. The only direct precedent that I am aware of that would support that is 223 years old, and it was overruled, in Hylton v. United States (1796). Hylton held that a tax on carriages was not a direct tax as only taxes on people or land was a direct tax. Hylton lasted until Pollock v. Farmers’ Loan & Trust Company (1895) in which the Supreme Court held that “taxes on personal property, or on the income of personal property, are likewise direct taxes” and therefore have to be apportioned. Pollock led to the Sixteenth Amendment which superseded Pollock by excluding income taxes from requiring apportionment, but did not change the Pollock opinion as to taxes on personal property. But one could argue that the last 124 years of precedent is wrong. That precedent would most recently include NFIB v. Sebelius (2012) that the finding that the Obamacare individual mandate is not a direct tax.
These questions are not just being raised by me, even the liberal website Mother Jones is questioning whether Warren’s proposal is constitutional.
This isn’t the first time there have been substantial questions concerning whether a tax is an unapportioned “direct tax.” One issue we have been examining is whether the recent “Tax Cuts and Jobs Act” (2018) statute includes such an unconstitutional tax. That law includes a “one time deemed repatriation tax,” which increases taxes of U.S. owners of some foreign corporations based on the post-1986, untaxed foreign earnings of those corporations.
The problem with the TCJA is that the question of whether a person is taxed is based on ownership of the corporation rather than any activity. This has led two lawyers to note that “while one cannot predict with certainty that a challenge to [the deemed repatriation tax] would be successful—particularly given the general reluctance of courts to strike down taxing statutes on constitutional grounds—the authorities strongly suggest … [it may] well be found to be invalid.” Additionally, a law review article in the Yale Journal on Regulation has recently been published claiming “The Mandatory Repatriation Tax Is Unconstitutional.”
The Constitution requires that direct taxes need be apportioned, and that cannot just be ignored.