As she officially kicked off her presidential campaign last weekend, Sen. Elizabeth Warren rallied her supporters behind her signature proposal: a wealth tax on the rich. The Massachusetts Democrat wants an annual charge of 2 percent on the holdings of anyone with more than $50 million in assets. Billionaires would be subject to a 3 percent tax, to “make sure rich people start doing their part for the country.” Polls show that Warren’s “ultra-millionaire tax” is overwhelmingly popular, with 60 percent of voters favoring it, including a majority of Republicans.
It is also probably unconstitutional. A legal challenge against it would immediately rekindle a debate first argued by James Madison and Alexander Hamilton. Our founding document says the federal government can levy only a few, very specific kinds of taxes. Warren’s plan is outside the rules.
The Constitution has several provisions limiting federal tax authority. First, all but the enumerated powers are left to the states or the people. That meant very limited taxation powers, at least until the 16th Amendment permitted the income tax in 1913. Some scholars say the stringent original tax provisions were part of a deal struck with Southern states that allowed them to count a slave as three-fifths of a person. Others insist they are an anachronism reflecting how taxes were levied in the earliest days of the republic. It is also true that many framers wanted to constrain the federal government, and one of the best ways to do so was to limit its ability to tax and raise revenue.
Article I, Section 8 allows Congress to “lay and collect taxes, duties, imposts and excises.” But it also requires that these “be uniform throughout the United States.” The next section says that “no capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.” That means any tax must be paid on a per capita basis that is uniform among the states. A “capitation tax” is a “head tax,” based on population, creating a fixed, even burden, like a sales tax. It’s confusing enough that, during the Constitutional Convention, Rufus King of New York asked “what was the precise meaning of direct taxation.” The official record says, “No one answd.” Nevertheless, courts have generally understood a direct tax to be a levy on income or wealth, as opposed to a tax on purchases or services.
While new federal taxes have been implemented, they have not been directed at a person’s wealth per se. Even the inheritance tax was upheld in 1900 as covering transfers of wealth, rather than wealth itself, and the Supreme Court in 1911 said corporate taxes are permissible because they are an excise tax on doing business.
Warren’s plan is different from all of these (and from clearly constitutional proposals like the 70 percent income tax suggested by Rep. Alexandria Ocasio-Cortez). It seeks to collect 1 percent of the country’s annual gross domestic product from those people with a worth of $50 million or more — not their income but their wealth. Yet if it is treated as a direct tax under Article I (and not construed as an income tax under the 16th Amendment), it would have to be “apportioned” among the states according to their percentage of the national population. It is not clear how that would work. Clearly, it would make no sense to tax all Californians to collect 12 percent of the wealth taxes for the super-rich. But if the tax is applied to just the super-rich in a given state, other weird problems emerge, since Article I uses the percentage of the national population as a whole. Some states, such as Kansas or Mississippi, may have fewer deep pockets that would have to carry the whole tax for that state. The affluent people there could pay more than their rich counterparts in New York or California. Even states of similar size can have different numbers of highly wealthy individuals — leading to unequal burdens. A tax applied in this way could not be tied to each person’s actual wealth level, which is what Warren is seeking.
One way to avoid this is to declare that any tax — on wealth or income — is permissible because, over time, the meaning of “tax” has changed . Indiana University professor Dawn Johnsen and Duke professor Walter Dellinger maintain that there is now no “principled . . . interpretive methodology” that would treat a wealth tax differently from an income tax. The University of Chicago’s Daniel Hemel, meanwhile, believes that courts could be persuaded to treat personal property like income under the 16th Amendment, though he admits that, based on precedents, judges wouldn’t be likely to extend such a broad interpretation to buildings and land under the Warren plan.
But the text, history and precedent do not support such assurances. At best, it would be a close call for judges; those who believe in textual interpretations of the Congress, such as Justices Clarence Thomas, Samuel Alito, Neil Gorsuch and Brett Kavanaugh, would probably frown on these claims.
This issue came up early in the republic’s history. Madison, the principal drafter of the Constitution, insisted that a proposed tax on carriages in 1794 was a direct tax and thus unconstitutional. To him, the carriage tax looked like any other tax on personal wealth. Conversely, Hamilton, then commerce secretary, argued that it was constitutional because the carriage levy was an “excise tax” on purchases. In 1796, in Hylton v. United States, the Supreme Court agreed with Hamilton, permitting the carriage tax. That result works in Warren’s favor, but on closer examination, Hamilton’s view was more complicated. His definition of a direct tax agreed with Madison that there could be no tax “on the whole property of individuals or on their whole real or personal estate.” In other words, a wealth tax. Warren’s tax.
Nearly a century later, in Pollock v. Farmers’ Loan and Trust Company, the justices reaffirmed the prohibition of other taxes, including an income tax, resulting in the passage of the 16th Amendment. But this update did not simply give Congress the same taxing authority as the states. It allowed only for an income tax, blocking any other kind of national tax that Washington might want to impose. Since then, the Supreme Court has defended this line between taxes on wealth and taxes on sales or income. In Knowlton v. Moore in 1900, it stressed that the “inheritance tax is not one on property, but one on the succession,” meaning it could be imposed because it was a “death duty” charged on the transfer of wealth, not a wealth tax. As recently as 2012, in his landmark ruling upholding Obamacare’s individual insurance mandate, Chief Justice John Roberts felt it was necessary to point out that the court “continued to consider taxes on personal property to be direct taxes.”
Warren’s proposal would constitute a radical expansion of federal taxing authority. While Congress currently imposes a wide variety of open and hidden taxes and tariffs (including taxes on property transfers, payroll, inheritance, capital gains, dividends and corporate profits), this would be something new: forcing individuals to account for their assets and annually pay for having such wealth. It’s always possible that a future President Warren could pick a Supreme Court majority to uphold her wealth tax. But that would still require a transformative change to our reading of the Constitution.
Warren’s proposal is popular, since the only people affected would be what she describes as the “tippy-top 0.1%.” The closest most of us will get to this type of wealth is a Monopoly game; currently, less than 1 percent of the country seems to own virtually all the property on the board. Inequality is a serious matter.
Yet constitutional integrity also matters. There are legal ways to address inequality, such as an income tax or even a constitutional amendment for taxing authority. How we do things is as important as what we do. The framers sought to bar the “tyranny of the majority” against the minority — even if they are at the “tippy-top.”