Current wealth-tax proposals take the form of a small-percentage annual tax on individuals’ net worth over some large exempt sum. For example, Sen. Elizabeth Warren (D-Mass.) has proposed an annual tax of 2 percent on wealth in excess of $50 million, with a 6 percent tax on wealth in excess of $1 billion.
The supposed constitutional problem involves a notoriously flawed 1895 decision: Pollock v. Farmers Loan and Trust Company. In that case, a sharply divided court reversed a century of precedent and practice to invalidate the nation’s first peacetime income tax, with sweeping language that effectively denied Congress the authority to tax income or wealth.
Pollock was part and parcel of the discredited Lochner Era. It also was one year before the stain of upholding Jim Crow segregation in Plessy v. Ferguson. The court thus took its wrong turn during one of its darkest periods. From 1895 to 1937, the court invalidated numerous progressive economic policies — child labor and worker protections, minimum wages, maximum hours and more. All now are widely recognized as policy choices constitutionally entrusted to our elected representatives.
Pollock was so weakly reasoned and wrong that the nation rejected it before the others were overturned, by quickly ratifying the 16th Amendment to authorize a national income tax. This extraordinary reaction obviated the need for the court to rectify Pollock, even as it abandoned numerous other decisions that similarly had been driven by its hostility to any legislation that had the effect of economic redistribution.
Consistently before Pollock, and almost always since, the court has upheld Congress’s extensive authority to tax. Indeed, the dire need for a system of national taxation provided a principal impetus to the Constitution’s replacement of the unworkably weak Articles of Confederation, with its failed method of unenforceable state “requisitions” of revenue.
The argument against a wealth tax rests upon a little-known constitutional requirement that a “direct” tax be apportioned among the states by population. This requirement was part of the infamous constitutional compromise that counted enslaved persons as “three-fifths” of a person for purposes of legislative representation and direct taxes. As the Supreme Court has often noted, no clear understanding existed at that very different time about what taxes might be affected. James Madison’s notes from the Constitutional Convention report: “Mr. King asked what was the precise meaning of direct taxation? No one answered.” This ambiguity served the goal of compromise in the face of North-South disputes that threatened to defeat the new Constitution.
The court immediately took up the question. In its seminal 1796 Hylton case, justices who had personally taken part in the Constitution’s framing and ratification considered the undefined, variable nature of the three-fifths compromise against what the court noted was the “great object” of the Constitution: “to give Congress a power to lay taxes, adequate to the exigencies of government.” They interpreted “direct” taxes narrowly, as limited to those to which the apportionment requirement reasonably applies.
Hylton unanimously upheld the constitutionality of an annual national tax on carriages, a tax akin to a national wealth tax in that it taxed a luxury property. To apportion the carriage tax by state population rather than according to carriage ownership would have been inequitable and nonsensical. Similarly, a national wealth tax justly and sensibly reflects individual net worth, and not sharp economic variations among the states.
Some recent arguments against a national wealth tax are based not on endorsement of the clearly flawed Pollock decision but on speculation that the court as currently constituted might be open to reliance on Pollock. This attempt at justice-by-justice vote- counting on an untested issue — always a fraught effort — is especially inappropriate and premature here. Several Supreme Court terms certainly will pass before Congress, after what is sure to be robust consideration of varied options, might enact some form of a national wealth tax, and before potential litigation winds its way to a differently informed, and possibly differently constituted, court.
In the meantime, the vigorous policy debate over a national wealth tax — still at the early stages — should proceed.