Is a federal wealth tax legal?
In the run-up to the 2020 presidential election, Sens. Elizabeth Warren and Bernie Sanders have hinged their campaigns on expansive plans that rely, in large part, on proposals to tax the wealth of the richest Americans.
The problem, some critics warn, is that a federal wealth tax might not be constitutional.
When Warren, D-Mass., unveiled her plan -- which called for a 2 percent tax on individuals worth more than $50 million, and a 3 percent tax on billionaires -- in January, she came prepared for accusations that her tax violated the Constitution, producing letters from two prominent law scholars who believe the so-called “Ultra-Millionaire Tax” is legal.
Sanders, I-Vt., likewise leaned on economists to back up his plan, which included a 1 percent tax on married couples worth $32 million and ultimately went up to an 8 percent tax on those with wealth over $10 billion.
However, scholars remain split about the legality of such a levy.
Under the Constitution, Congress has the power to impose direct taxes under the rule of apportionment -- essentially ensuring impartial federal treatment of states by requiring the government to levy direct taxes in a way that results in an equal amount collected in each state.
That caveat was part of a compromise with the slave-holding South, according to Yale professor Bruce Ackerman, an original proponent of the wealth tax. The purpose of it was to prevent the North from imposing a "head tax" on slaves, because that could not be apportioned equally across the states.
"Given this history, it is extremely unlikely that the justices will cite the founders’ original compromise with slavery to bar a tax that would serve the cause of economic equality and democratic legitimacy," Ackerman wrote in a Los Angeles Times op-ed in 2011.
The Sixteenth Amendment then semi-overrides that by giving the government the capability to impose an income tax without apportionment, meaning Congress doesn’t have to ensure equal treatment if the direct tax is an income tax.
Because a wealth tax would seem to be a direct tax -- therefore meaning it needs apportionment -- that would seem to block Warren or Sanders from passing one if they won the 2020 presidential election, according to Chris Edwards, director of tax policy at the Cato Institute.
But Edwards said there could be a loophole that would allow an ultra-millionaires tax to remain standing.
“There may be wiggle room for a wealth tax to pass legal muster,” he said. “Rather than taxing wealth directly, supporters could add a provision to the current income tax code to tax an assumed fixed annual return from a measure of household wealth. The economic effect would be similar, but such a new wealth tax would look like an income tax."
If the case headed to the Supreme Court as it currently looks, it would likely be decided 5-4, with Chief Justice John Roberts as the swing voter.
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However, there are other proponents of the wealth tax who disagree about its constitutionality, arguing the meaning of a "direct tax" can be interpreted in different ways because the definition is not specified in the constitution.
Calvin Johnson, a University of Texas professor, argues that because in a recent ruling -- National Federation of Independent Business v. Sebelius -- the Supreme Court held that a tax imposed by the Affordable Care Act on those who did not purchase health care was constitutional without the need for apportionment.
In making the decision, the justices relied on a case from 1796 (Hylton v. United States) that ultimately found a tax on carriages was not a direct tax and therefore did not violate the Constitution. Under that hypothetical, tax rates in Virginia would have had to be 10 times the tax in New York, because New York had 10 times more carriage per capita than Virginia did.
Essentially, Johnson argued, the Hylton rule means that a tax that is not reasonably apportioned is not a direct tax.
"Apportionment is part of a rational scheme to apportion taxes to reach wealth, and if the apportionment does not function that way, its range ends and the tax is not 'direct tax,'" Johnson said.