Is A Wealth Tax Constitutional?
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Twenty years before a wealth tax became a serious consideration in national politics, two legal scholars battled over whether the policy would be constitutional.
Erik Jensen, now an emeritus professor at Case Western Reserve School of Law, says he got interested in the policy back in 1999. That's when "a guy named Donald Trump," who was then running to get the presidential nomination of the Reform Party, proposed a one-time wealth tax of 14.25% on people with a net worth over $10 million. "And well, he obviously was not a national enough figure, at least in the political sphere, for anybody to really care what he was proposing." Jensen, nonetheless, came to the conclusion that such a wealth tax would be unconstitutional.
Bruce Ackerman, a professor at Yale Law School, got interested in a wealth tax even earlier. In the mid-1990s, he co-wrote a book with Anne Alstott called The Stakeholder Society, and they actually proposed a wealth tax. In 1999, he published a long article arguing the policy would be constitutional.
And then the debate kinda went to sleep for twenty years. That is, until earlier this year, when Senator Elizabeth Warren woke it back up when proposing her "Ultra-Millionaire" wealth tax. When launching her proposal, Warren included a letter from Ackerman preemptively defending the policy from legal attacks.
Ackerman and Jensen are now butting heads like it's 1999 again. Only this time, people are paying attention.
The 1895 Case That Could Be Trouble For A Wealth Tax
The late nineteenth century is known as the Gilded Age. You know, fat cats in top hats. Robber barons. Historic inequality. Then a populist movement took America by storm, and they got an income tax levied on the ultra-rich.
In 1895, in a case called Pollock v. Farmers Loan and Trust Company, the Supreme Court declared the income tax was unconstitutional. "The conclusion was that the income tax was a direct tax — at least in so far as it reached income from property — and it therefore had to be apportioned to be constitutionally valid," Jensen says.
The Constitution, in two separate provisions, says that "direct taxes" have to be apportioned by state population. That means a state's tax burden is determined by the size of their population. It doesn't matter how much income or wealth or whatever's being taxed is in the state. If California has 10 percent of the national population, it has 10 percent of the tax burden. In order for the math to work, the rule means tax rates will have to be wildly different in each state.
This rule is kryptonite for anything considered a "direct tax." And since the founding, there's been a huge debate over what a direct tax actually is. But the Pollock case took an expansive view. It ruled all taxes on property are direct taxes. Not only that, it ruled all taxes on income from property are direct taxes. And because apportioning an income tax would have been a nightmare, the ruling meant the income tax had to go away until there was a constitutional amendment in 1913.
The Pollock decision, which was split 5-4, represented a dramatic departure from a century of legal precedents. Bruce Ackerman argues we should reject Pollock and go back to a view first articulated by the Supreme Court in the early days of the republic.
Horse-Drawn Carriages To The Rescue?
In 1794, President George Washington signed into law what might be considered the first federal wealth tax. It was a tax on property: horse-drawn carriages. We have an entire episode about this tax and the subsequent legal battle over it.
The Supreme Court upheld the carriage tax. The justices called the apportionment rule "absurd" and "radically wrong." One justice said the rule should only be adopted in cases where "it can reasonably apply," and if it results in wildly unequal tax rates between the states, it's not reasonable. Another justice said that this provision in the Constitution was entirely about appeasing the South, which wanted to make it hard to tax the pillars of its slave-based economy. That's why he said the direct tax rule only clearly applied to taxes on land and slaves, and it "ought not to be extended" beyond this.
Scholars like Ackerman point to these opinions as supporting the constitutional case for a wealth tax. After the ruling, Ackerman says, the Supreme Court upheld every single tax that came across its radar. This included the income tax in 1880. He considers Pollock to be an aberration. It led to a public outcry, and he says, the Supreme Court backtracked, upholding the constitutionality of the inheritance tax in 1900. Pollock, he says, was then formally "repudiated" by the 16th Amendment, which said the income tax would not have to follow the direct tax rule.
But the 16th Amendment clearly says "income" tax. It doesn't say "wealth" or "assets" or "property." Constitutional scholars like Erik Jensen believe that's a problem for a wealth tax.
The Roberts Court
Without an amendment, the Supreme Court has the final word on the constitutionality of the wealth tax, and Jensen believes the current court, under Chief Justice John Roberts, would likely knock it down. In 2012, the Roberts Court considered the constitutionality of Obamacare's individual mandate, which required Americans buy health insurance. Roberts upheld the mandate by declaring it a form of tax — and that led him down the path to revisiting the direct tax rule.
Roberts acknowledged the carriage tax in 1796 was upheld because the Supreme Court reasoned "apportioning such a tax would make little sense," and that this "narrow view" of what the direct tax rule applied to "persisted for a century." But then Roberts gets to Pollock, and he says while the ruling was "overturned by the 16th Amendment," the Supreme Court "continued to consider taxes on personal property to be direct taxes."
Jensen believes this view is a problem for wealth tax supporters. "What is a tax on wealth other than a tax on property?" he says. "If you are going to argue as Professor Ackerman and others have done that an unapportioned tax on wealth is constitutionally valid, you just have to deal with the Chief Justice Roberts' opinion."
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