Debates about the idea of a wealth tax are suddenly sounding a lot less hypothetical.
With massive expenditures related to the Covid-19 pandemic, the U.S. needs to find ways to raise revenue. And with the economic burdens of the calamity falling disproportionately on the less affluent, income inequality has only become more glaring. No wonder the call to target the richest has increasing appeal.
But is a wealth tax constitutional? It’s a question legal scholars have long discussed. Unfortunately, the answer is elusive. For that reason alone, there is a good argument that progressives should focus on other options – such as imposing higher income taxes on the wealthy and closing the many loopholes that benefit them.
Let’s start with the 16th Amendment to the Constitution, ratified in 1913, which provides: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
If Congress wants to raise rates on the wealthy, it’s perfectly entitled to do that. Notably, however, the 16th Amendment is limited to “taxes on incomes,” so it does not authorize wealth taxes.
Still, Congress imposes a lot of other kinds of taxes, such as the ones on cigarettes, alcohol and gasoline. Everyone agrees that these are “indirect” taxes, in the sense that they are not paid directly by consumers.
That matters, because the Constitution imposes a serious barrier to direct taxes. Article I, section 9, clause 4 of the Constitution provides, “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."
This means that any “direct” tax must be apportioned among the states by population. And if a wealth tax counts as a direct tax, and thus has to be apportioned, almost everyone agrees that it’s dead in the water, simply as a matter of political reality.
The reasons are a bit technical, so in brief: Under the Constitution, a state's tax burden, under a direct tax, is determined by the size of its population. Since New York has 6.1 percent of the U.S. population, it would have to pay 6.1 percent of the total tax national burden. Since Utah has 0.9 percent of the U.S. population, it would have to pay 0.9 percent of that total.
Here’s the kicker. A state’s per capita income or wealth doesn’t matter. It follows that the arithmetic can’t be made to work unless tax rates on the wealthy are much higher in some states than in others. There’s no way that Congress would agree to allow that.
The big question, then, is whether a wealth tax is, in fact, a direct tax. Alexander Hamilton, who knew something about taxes, wrote in the Federalist No. 36 that taxes on “houses and lands” are direct. And in a brief before the Supreme Court, Hamilton said that taxes “on the whole property of individuals” count as direct.