Here’s Why Elizabeth Warren’s Wealth Tax Is Completely Unconstitutional

Here’s Why Elizabeth Warren’s Wealth Tax Is Completely Unconstitutional

Warren, a Harvard law professor, understands the difference between direct taxes and indirect taxes, but she’s counting on the people not to pay attention.
Kyle Sammin
By

If any trait characterizes the far left in 21st-century America, it is plans. They have plans for the country, plans for you, plans for your kids, plans for your house, and plans for your workplace. And your property? You know they’ve got plans for that.

In the 19th-century quasi-socialist movement once made up of farmers and laborers who wanted to build, harvest, and create, planning was a piece — but only a piece — of the agenda. Democratic socialism (or whatever guise the hard left puts on these days) is the realm of people who build nothing, but they have plans upon plans for things others have built.

The leading presidential candidate of the planners is the senior senator from Massachusetts, Elizabeth Warren. She has made a slogan about having a plan for this and that, and her plan likely to do the most damage to America and the rule of law is her ill-considered, demagogic plan for a wealth tax.

The plan appeals to a certain envious segment of the mob, but a few minutes’ thought reveals its manifold flaws. As her opponent and former Rep. John Delaney said in the last Democratic presidential debate, the wealth tax is both a violation of the Constitution and a crime against good sense.

A Huge Constitutional Problem

The main problem with Warren’s plan is that it violates the Constitution. Understanding why requires understanding the difference between direct taxes and indirect taxes. Warren, a Harvard law professor, surely gets this, but she’s counting on voters to not to pay attention.

Warren calls her plan the “ultra-millionaire tax,” and that certainly has a pleasant ring to it for many people. (Look! There’s even a graph! She makes a lot of graphs.) Can the super rich afford to pay a little more in taxes? Sure, they won’t starve. Do people think the top income tax rates should be higher? Polls from earlier this year show a majority of voters would be happy to raise that rate quite a bit. But that is not what Warren is calling for here.

When we say “tax the rich,” we typically mean “increase the top marginal rate of the federal income tax.” Maybe we even mean “impose a sales tax on the kind of luxury items rich people buy,” or “eliminate the favorable tax treatment for capital gains and deferred income.” These are all permissible, if not necessarily smart. Yet Warren’s tax is a wealth tax, a direct federal impost on people’s property, and that presents a huge constitutional problem.

Warren’s wealth tax would impose a 2 percent annual tax on household net worth between $50 million and $1 billion and a 3 percent annual tax on household net worth above $1 billion. According to her website, “All household assets held anywhere in the world will be included in the net worth measurement, including residences, closely held businesses, assets held in trust, retirement assets, assets held by minor children, and personal property with a value of $50,000 or more.”

Wealth Taxes Aren’t Income Taxes

The question of which taxes the federal government may impose has been debated since the American Revolution. Under the Articles of Confederation, Congress could not impose taxes but could only ask the states to give it the funding it needed to pay its expenses, including the salaries of the Continental Army.

The states were often tardy in doing so. Some did not pay at all. It was an untenable system for any government, and the delegates to the Constitutional Convention of 1787 looked to fix that.

At the same time, the delegates did not want to surrender all of the states’ powers to the new government, nor to create a taxing power so vigorous that it would make Congress too powerful. In Article I, Section 9, they split the difference, providing that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”

Indirect taxes were allowed, but direct taxes had to be imposed proportionally across the states according to population, a formulation so bizarre that it renders the direct taxes politically unacceptable and logically outlandish.

What Is Direct Taxation?

That’s all fine, but it leads us to ask: What is a direct tax? The framers had an idea but declined to articulate it with much precision, as James Madison recorded in his notes.

The answers found in early case law are also less than exact. The Supreme Court first considered the question in Hylton v. United States way back in 1796 and thoroughly confused the issue.

Justice Samuel Chase’s opinion was that a federal tax on carriages — something that looks very much like a direct tax on property — was not a direct tax. Congress thought it was constitutional, he reasoned, so it must be. Further, applying the tax proportionally by state would produce an absurd result, so Congress must have rightfully declined to do so.

Justice William Paterson wrote that only taxes on people and land, and possibly the direct produce of the land, were direct taxes, inventing a distinction between real property and other kinds of property. Justice James Iredell reasoned backward to produce his opinion, arguing that if direct taxes must be proportional, then only those taxes that could be reasonably made proportional could be considered direct.

Hylton was a mess and reflects the founders’ uncertainty about direct taxes. More than that, it shows a deference to the political branches typical of the early court. Judicial review is a concept that predates the American Constitution, but the first time the Supreme Court used it to strike down a federal law was not until 1803 in Marbury v. Madison. It did not do it again until 1857.

The court in those days understood its role to be restrained unless the case before it rendered restraint impossible. Hylton reflects a judicial system that would go out of its way to let the people’s elected representatives decide how the country was governed.

Are Income Taxes Direct Taxes?

The court whiffed in Hylton, but it received more at-bats in years to come. For almost 100 years, it rested on Hylton’s deference, letting Congress do whatever it wanted on direct taxation. The political will of the country in those days was not to do much, so it did not become a big problem. Taxes levied during the Civil War pushed the limits of the Hylton doctrine, but the exigencies of the conflict allowed everyone to look the other way.

In 1895, the court finally had to reckon with the direct tax question in Pollock v. Farmers’ Loan & Trust Company. It did so with the clarity that had been absent from its predecessors’ efforts. The subject of Pollock was an income tax. Congress had passed a temporary income tax during the Civil War, and the court upheld it, but in the Revenue Act of 1894, Congress imposed one on a more permanent basis, and a new court challenge followed.

Chief Justice Melville Fuller wrote for the majority to correct the logical error in Hylton: “We are unable to conclude that the enforced subtraction from the yield of all the owner’s real or personal property, in the manner prescribed, is so different from a tax upon the property itself that it is not a direct, but an indirect, tax in the meaning of the Constitution.”

Essentially, if a tax on property is a direct tax, as the court in Hylton stated, a tax on the income derived from property must also be a direct tax. This was, as Fuller explained, no more than an obvious reading of the Constitution’s words:

We know of no reason for holding otherwise than that the words ‘direct taxes,’ on the one hand, and ‘duties, imposts and excises,’ on the other, were used in the Constitution in their natural and obvious sense. Nor, in arriving at what those terms embrace, do we perceive any ground for enlarging them beyond, or narrowing them within, their natural and obvious import at the time the Constitution was framed and ratified.

Pollock reflected a court more comfortable in its constitutional role and a Congress increasingly willing to ignore the plain text of that document. In dividing all taxes between indirect taxes such as excises and duties (levied on the sale or importation of a thing) and direct taxes such as property taxes (levied on the possession of a thing), the court set income taxes in the latter category.

That remained the law, with some refinement, until 1916. By then, Progressive demands for an income tax led Congress and the states to approve the Sixteenth Amendment.

Some Unapportioned Direct Taxes Are Permissible Now

Faced with unpopular court rulings, Americans once corrected them by the constitutional amendment process. That is what the Sixteenth Amendment did, giving Congress the right “to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States.”

In passing the amendment, Congress acknowledged that income taxes were direct taxes and changed the Constitution to create an exception to the rule that they must be apportioned. The amendment did not so much overturn Pollock but changed the law so the logic of that case no longer invalidated the tax. It left the world of federal taxes divided into three parts:

  1. Direct taxes on people or property: unconstitutional unless apportioned by state population
  2. Direct taxes on income: now constitutional even without apportionment
  3. Indirect taxes on sales and imports: constitutional, as they always had been

The amendment shifted the balance between the federal government and the states, as well as between government and citizens. The power to tax incomes and impose tariffs was enough for the federal government, for a while, and the new permission to tax “incomes, from whatever source derived” was very broad. So while Pollock and the Sixteenth Amendment did not clarify the direct tax question fully, they answered most of the questions Congress and the courts were asking.

The most recent case to touch on the question was 2012’s National Federation of Independent Business v. Sebelius, better known as the “Obamacare case.” In the 5-4 decision, Justice John Roberts famously ruled that while the commerce clause does not give Congress the power to make people buy insurance, Congress does have the power to tax anyone who declines to do so.

Obamacare’s individual mandate survived as a tax, but what manner of tax? As a tax on a person, was it not a direct tax? And since it was a flat amount, not a percentage of a person’s income, was it not a direct capitation, requiring apportionment by population? Using a very strained reading of Hylton, Roberts said it was not:

A tax on going without health insurance does not fall within any recognized category of direct tax. It is not a capitation. Capitations are taxes paid by every person, ‘without regard to property, profession, or any other circumstance.’ The whole point of the shared responsibility payment is that it is triggered by specific circumstances — earning a certain amount of income but not obtaining health insurance. The payment is also plainly not a tax on the ownership of land or personal property. The shared responsibility payment is thus not a direct tax that must be apportioned among the several States. (citations omitted)

Hylton contained examples of what might be considered a direct tax. Roberts took these examples and said they were the only things that could be considered direct taxes. That allowed him to wedge the penalty into a corner Congress never intended.

It also made a mess of the direct tax jurisprudence that had prevailed since Pollock. In dissent, Justice Antonin Scalia said that part of the ruling “is a question of first impression that deserves more thoughtful consideration than the lick-and-a-promise accorded by the Government and its supporters.”

Roberts confused the issue considerably in NFIB v. Sebelius, but the core holding of direct tax jurisprudence from Hylton to Pollock to NFIB to today remains intact: A tax on property is a direct tax, and Congress may not levy it without apportioning it according to state populations. Because she proposes not to do this, Warren’s wealth tax must be considered unconstitutional.

Why Not Apportion It, Then?

If the wealth tax is illegal as an unapportioned direct tax, Warren’s answer might be to apportion it as the Constitution directs. But apportionment has stood in the way of direct taxes since the country’s founding, for a good reason: It produces bizarre and inequitable results. Justice Chase observed in Hylton that apportioning such a tax is so odd that he could not believe Congress would ever do it.

Here’s why: Apportionment by state means the total revenue collected would have to be determined first (presumably by Congress), then apportioned to each state according to population, not according to wealth. So if California contains 12 percent of the national population (as it did in the 2010 census), it will pay 12 percent of the tax, regardless of how much money the people there have.

This would be bad enough applied to a normal tax, but a tax that falls only on the property of the super wealthy could not possibly be administered this way. Warren says her tax will fall on “roughly the wealthiest 75,000 households” in America. But are those households equally distributed around the country? Of course not.

The concentrations of wealth in New York and California — concentrations Warren decries — mean those states have a disproportionate share of very wealthy citizens. Yet the more are gathered in one place, the lower each billionaire’s share of the wealth tax would be. And if a state had no such wealthy families? Payment of the tax would be impossible, or else fall on regular folks.

The Constitution explicitly bans this tax, and every interpretation of the direct tax clause the Supreme Court has ever issued puts the wealth tax on the wrong side of the law. No reasonable interpretation of the text or the case law can save it. That alone should doom Warren’s effort, but as we will explore in Part 2, there are even more reasons Americans should reject this terrible idea from a candidate whose plans for their lives and their property are not what they seem.

Kyle Sammin is a lawyer from Pennsylvania, a senior contributor to The Federalist, and the co-host of the Conservative Minds podcast. Read some of his other writing at his website, or follow him on Twitter at @KyleSammin.

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