Unclear if Warren’s Wealth Tax Proposal is Constitutional

January 25, 2019

My colleagues yesterday wrote about Senator Elizabeth Warren’s proposal for a wealth tax on high-net-worth individuals. Another issue is that a wealth tax may violate the U.S. Constitution, though legal opinions thus far are mixed. Our report did not analyze whether a wealth tax would be constitutional, and the short answer is that it’s unclear.

The Constitution prohibits federal direct taxes that are not apportioned by population, except for the income tax which is specifically permitted by the Sixteenth Amendment. I think every expert would agree on those points.

So the question is, what is and is not a direct tax? In one of the first U.S. Supreme Court cases, the Hylton case of 1796, they observed that a capitation, or head tax (flat rate on each person), would be a direct tax and thus unconstitutional if not apportioned. In the Pollock case of 1895, they came to a similar conclusion. That’s why the Sixteenth Amendment was adopted, to allow income taxes to be constitutional. An attempt to tax unrealized capital gains was struck down in the Macomber case of 1920.

Every other tax that has been challenged on these grounds has been upheld. Inheritance and estate taxes were upheld in the Knowlton case of 1900 not as direct taxes on wealth, but as indirect taxes on the transfer of wealth. Corporate income taxes were upheld in the Flint case of 1911 not as taxes on the value of shares or income, but as excise taxes on the privilege of doing business in the corporate form. However, those taxes in some way involve a transaction, while the Warren wealth tax does not.

I’d argue that the term “direct tax” is a proxy for incidence, as there’s solid evidence from the Founders that’s what they were getting at by using the term. Based on that and the precedents, my inclination is that Warren’s proposal would be found unconstitutional. But it’s not a slam-dunk case, as the precedents go both ways, and it’s not an area the Court has opined on for a long time.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

A direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax.

A wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary.

An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.