Bench Memos

The Constitutional Fiasco of a Wealth Tax

Today the New York Times gave a large chunk of op-ed real estate (1,300 words) to Daniel Altman, a former Times editorial board member now teaching economics part-time at NYU.  Concerned about wealth inequality–which he regards as a much more serious problem than mere income inequality–Altman proposes that we enact a wealth tax.  This would target not what people earn but what they own–the houses, the cars, the money in the bank, the privately owned businesses, the investment portfolios themselves rather than the interests and dividends therefrom, and so forth. 

Altman recognizes various practical difficulties with the implementation of such a tax, but he is convinced it would be a good alternative to our present income tax.  He proposes wealth tax rates of “zero percent up to $500,000 in wealth, 1 percent for wealth between $500,000 and $1 million, and 2 percent for wealth above $1 million.”  He continues with this sketch:

To see how the wealth tax would work, consider a family with $500,000 in wealth and $200,000 in annual income. Right now, they might pay $50,000 in federal income tax. With the wealth tax brackets described above, they would pay nothing. On the other hand, a family with $4 million in wealth and $200,000 in annual income would owe $65,000. Most families that depend on their wealth for their income would pay more, and most that depend on their earnings would pay less.

Even assuming, as I do not, that the inequality Altman describes is in itself an injustice, or the cause of injustices, he is overlooking one huge problem–actually a set of problems–for any such proposal.  It is contained in the Constitution, which says the following:

Art. I, §2, cl. 3: “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers . . . The actual Enumeration shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years . . .”

Art. I, §9, cl. 4: “No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”

Sixteenth Amendment (1913): “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

There is ample precedent for concluding that the kind of wealth tax Altman proposes would be a direct tax as the Constitution uses that term.  In 1895, the Supreme Court–mistakenly, in my view–held that the income tax was a direct tax, and that inasmuch as it was not apportioned by states as the Constitution commands, it was unconstitutional.  But whether the income tax was or was not a direct tax–a question mooted by the Sixteenth Amendment eighteen years later, which authorized any kind of income tax without geographic apportionment–there is no question that a “wealth tax” is direct.  It rests upon the value of the property one owns, real or personal, at any given moment when it is assessed for tax purposes.

Why would such a tax be a constitutional fiasco?  Consider what it means for a national property tax to be “apportioned among the several States” according to the census.  It means first of all that the government must have a revenue target, or else there is nothing to be “apportioned.”  So rather than set fixed percentages nationally for various “wealth brackets” as Altman does, on the basis of a guess at how much money the tax will raise, the government must have fairly certain, or highly probable, knowledge of the intake it will receive from the tax. 

Altman says that in 2010 the government took in about $833 billion in 2010, after refunds, from the income, estate, and gift taxes.  So let’s round up to a cool one trillion dollars for some tax year in the near future, and set that as the revenue target for a wealth tax.

Using the most recent decennial census figures for 2010, the population of the U.S. was 308,745,538 persons (citizens and aliens).  In that census, Wyoming had a population of 563,626, and California a population of 37,253,956.  So Wyoming, with 0.18% of the nation’s population, would pay a corresponding portion of the trillion-dollar wealth tax, or $1.8 billion.  California, with 12% of the population, would pay $120 billion.

You notice the problem right away, don’t you?  These figures are arrived at without regard to the actual wealth held by the taxpayers in each state.  It seems crazy, and no doubt it is.  But it is what the Constitution requires.

It gets worse.  Take two states close to one another in size.  Maryland, in the 2010 census, had 5,773,552 people, or 1.87% of the population, while Missouri had 5,988,927 people, or 1.93% of the nation.  Pretty close, right?  Missouri residents, collectively, would have to pay more than Marylanders under Altman’s wealth tax.  But according to the “Quick Facts” at the Census Bureau, Maryland in 2010 was a much wealthier state than Missouri.  Incomes were higher in Maryland, with $34,849 per capita, as against $24,724 in Missouri, and $70,647 median household income in Maryland as against $46,262 in Missouri. 

What about the wealth Altman wants to tax?  Take real estate.  Home ownership rates were about the same (69% in Maryland, 70% in Missouri), but housing values were $329,400 in Maryland, and only $137,700 in Missouri.  Yet according to the constitutionally required formula, Missourians collectively will have to pay about the same, or a little more, in federal wealth tax, than Marylanders.  This means that the tax rates on assessed values of property will have to be much, much higher in Missouri than in Maryland, in order to raise the same quantity of revenue.

The problems pile up.  Wealthy people will be able to move their assets to new locations where, thanks to the clustering of others like themselves, they will individually pay far less than they would have in poorer states.  In the poor states they leave behind, the threshold at which the tax kicks in will inevitably have to be lowered, creating a brand new class of equality problems.  With the census taken only every ten years, crazy distortions will take place during the intervening years.  And this is before we even begin to consider the implementation problems of property valuation, including the corruption of tax assessors and the intrusion of federal tax agents into every corner of our lives to ferret out the value of everything we own.

Daniel Altman may not realize it, but he has prescribed a bureaucratic nightmare, and a hugely regressive tax on the people in the poorest states of the Union.

Matthew J. Franck is the Director of the William E. and Carol G. Simon Center on Religion and the Constitution at the Witherspoon Institute in Princeton, New Jersey.

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