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Is a Wealth Tax Constitutional, or Can We Even Know?

Write-Off: The Tax Blog

Elizabeth Warren’s proposed wealth tax has stirred a lot of controversy and debate.  Whether you like it or not, looming in the background of whether we should do such a thing is the constitutional question of whether we can do such a thing. Is a wealth tax, as proposed by Elizabeth Warren, constitutional? I am not a constitutional lawyer, and so as I tried to figure out the answer to this question by diving into what others had written, I got slightly confused. As I investigated, most confusing to me was that I found several scholars on both sides of the debate, all arguing vehemently that the tax is either so obviously constitutional that all arguments to the contrary are frivolous, or that it is so obviously unconstitutional as to be laughable. Even worse, it was pretty clearly split along partisan lines—generally those in favor of more taxes on a more encompassing base thought the tax was constitutional, and those who were generally not in favor of more taxes thought it unconstitutional.

What’s a person to do, especially a person whose formal constitutional training ended with introductory political science as an undergraduate?  My perception was that the people most vocal about the tax were those that may have strong opinions on taxation in general, and who had decided the question before seriously investigating it.  I had the idea to simply reach out to constitutional scholars and ask them what they thought about the tax, and especially how they thought it would fare in a Supreme Court challenge.  I emailed 26 people (the 26 most successful constitutional scholars I could find, by an objective measure), and was startled that about half responded, and the vast majority had useful, interesting, and insightful things to say. Some insights:

  • What is constitutional and what the Supreme Court decides are two very different things. Some matters are so unclear as it really comes down to almost purely politics, and many of my respondents believed that is what would happen.  They predicted either a 4-5 or 5-4 outcome, but only because of the political persuasions of the justices. Even scholars who believed the tax to be completely constitutional thought it would come down to a close decision.
  • In my unsolicited emails, I got one person who said the tax was clearly unconstitutional, and one person say it was clearly constitutional. But, the other ten or so people who responded were much less certain.
  • Some responded that they had not yet decided whether a wealth tax was constitutional. This was insightful to me, as, again, these are the very best lawyers at the very best law schools. If it is not self-evident one way or the other to them, it seems pretty clear that arguments that it is obviously constitutional/unconstitutional are not very compelling. It is very unpopular to say you don’t know, and that will not get you cited in the press or called to testify before Congress.  However, it may well be the best answer.
  • While a wealth tax may be unconstitutional, taxing wealth may not be. This is an idea that I had been exposed to before, but my respondents also brought up. You could make an income tax that adjusts for wealth in some way, and it could be constitutional (at least according to some).
  • One might wonder if it matters what Warren called the tax on the campaign trail, and if that might invalidate any attempt at taxing wealth by another name in the future.  In this case, I was told that President Trump’s Muslim ban that got rebranded and renamed and was upheld by the Supreme Court would be the precedent.
  • Several people said we can’t really know. The Constitution uses the phrase direct tax, but does not define it, and legal precedent on what a direct tax is is unclear (and literally hinges on things like the taxation of carriages centuries ago).
  • The intention of the framers is also difficult to understand, as they had very different economic concerns back then, and lived in a very different institutional environment. Corporations as we know them barely existed, and well-functioning financial markets as we know them were a thing of the very distant future. They lived in a world where most wealth was in land, and an annual wealth tax would cause serious liquidity problems. That problem exists today, but, at least some argue, many more assets are more liquid, and so the different way in which people hold wealth may relax some of the concerns of the framers.

Many of these things may be obvious to those of you more versed in the law, but I learned a lot from this exercise. I appreciate the time these scholars took to answer to me, and was pleasantly surprised how even-handed and unbiased and scholarly many people who responded to me were.

So, is the tax unconstitutional?  I don’t think we can really know.  The constitution does not explicitly say, and while we can certainly make arguments on either side, the question is not a trivial one, despite what many may say. Sometimes it is OK to just say we don’t know.

So what do I think of the wealth tax as a tax? I believe it tries to resolve a problem that does need some consideration. But, I don’t believe it is very enforceable, and believe it would create huge administrative costs for both tax administrators and taxpayers, would cause valuation and liquidity concerns, and I don’t think the tax, as she has proposed it, is a particularly workable idea (as history indicates).
But I still have no idea if it is allowed by the Constitution.
 
UPDATE: One of the constitutional scholars I talked to referred me to an excellent book, which references the discussion during the Constitutional Convention. This is a literal line from notes taking during the discussion: “Mr King asked what was the precise meaning of direct taxation? No one answered.” It seems like the framers themselves had no definition of the term.

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