Is a Wealth Tax Constitutional?
By Everett Yum ‘27
In recent years, Democrats have been considering levying an unrealized capital gains tax. Such a law would tax capital growth in assets before the asset’s value is “realized” (i.e. the asset is sold). At this point, pre-existing capital gains taxes would take effect, assuming the asset appreciated value. Progressive Democrats such as Senators Bernie Sanders and Elizabeth Warren have long supported the measure, and in 2022, President Biden proposed an unrealized capital gains tax in his 2023 budget. (1)
The measure is controversial for several reasons, one of which pertains to the measure’s constitutionality. Article 1, Section 9 of the Constitution reads (and Article 1, Section 2 has a similar clause), “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken,” meaning the funds of “direct taxes” must come from each state in proportion to its population. (2) Fundamentally, direct taxes are collected by the government, whereas indirect taxes can be passed onto an intermediary (such as sales tax), although legal definitions may lack clarity. In Hylton v. United States, an early Supreme Court case, Justice William Paterson questioned: “Whether direct taxes, in the sense of the Constitution, comprehend any other tax than a capitation tax, and tax on land, is a questionable point. If Congress, for instance, should tax, in the aggregate or mass, things that generally pervade all the states in the Union, then, perhaps, the rule of apportionment would be the most proper.” (3) He, along with other justices, limited direct taxes to land taxes and capitations, underscoring if a tax would affect all states, then direct tax apportionment should take effect. (4)
Pollock v. Farmers’ Loan and Trust Company (1985) then established the current precedent that not only capitation taxes and property are considered direct taxes, but also, according to Chief Justice Melville Fuller in his majority opinion,“taxes on the income of personal property as such are equivalent to taxes on such property, and therefore direct taxes.” (5) Taxes on income amounted to taxes on property. The justices dissenting argued that the court was breaking from the precedent of defining direct taxes as simply capitations and property taxes. Instead, the court was defining income, dividends, rents, and other “personal” property as “direct” taxes by incorporating them into the category of property. The majority opinion, in their view, focused on the “economic sense of the word ‘direct’” as opposed to the constitutional and judicial definitions of “direct tax.” (6)
It is worth noting that the Sixteenth Amendment of the Constitution makes an exception for section 9: Congress has “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.” (7) However, the amendment only made an exception for income taxes; the courts maintained the power over defining direct taxation.
Detractors of the wealth tax cite the Pollock precedent as the main reason a viable wealth tax would be unconstitutional. Philip W. Magness of the Independent Institute argues that, in accordance with Eisner v. Macomber (1920), money must be realized in order to be legally considered income. (8) Therefore, a wealth tax targeting unrealized capital gains would be a direct tax and consequently require apportionment. This prospect would effectively nullify the tax, since the billionaires affected by such a wealth tax are not evenly distributed throughout the United States, and, in practice, the government could not effectively enforce the tax. (9)
Supreme Court precedent has plainly defined what a direct tax is, though the Constitution does not. Chief Justice John Roberts wrote in his opinion in National Federation of Independent Business v. Sebelius (2012), “Even when the Direct Tax Clause was written it was unclear what else, other than a capitation…might be a direct tax.” (10) Daniel Hemel of New York University Law School disagrees with the Pollock decision, arguing that the court “got it wrong” and that the definition of a direct tax does not reasonably include tax on income. Hemel cites Cottage Savings Association v. Commissioner of Internal Revenue (1991) and Helvering v. Bruun (1940) as instances when the court asserted that the realization requirement of income tax was for “administrative convenience” and, therefore, could provide precedent to override the realization requirement of Eisner v. Macomber. (11)
Ari Glogower, David Gamage, and Kitty Richards argue, in an article published by the Maurer School of Law at Indiana University, that the apportionment clause originated from a North-South compromise when the Constitution was drafted. Southern delegates sought to prevent a slave-tax, which would contribute to the abolition of slavery, and apportioning direct taxes by population, by state, would prevent such a federal tax. (12) Furthermore, they argue that the interpretation historically adopted by courts, equating income tax to property tax and thus regarding it a direct tax, misconstrues the apportionment clause. The drafting delegates considered this clause as vague, while the courts have viewed it as a concrete and fundamental constitutional element. This “maximalist” interpretation of the apportionment clause directly contradicts the unambiguous taxation power the Constitution grants Congress; apportionment was not intended to prevent the efficacy of a federal tax. (13)
Calvin H. Johnson and John T. Kipp of the University of Texas extended this by stating that the “majority made up a ‘pseudo history’ and rationale for the apportionment rule, saying that it was designed ‘to prevent an attack upon accumulated property by mere force of numbers.’” (14) Indeed, the majority opinion of Pollock frames apportionment as a means of protecting private property, which Johnson and Kipp contend was a complete misinterpretation of the intention of the apportionment clause. In the view of Justice Oliver Wendell Holmes Jr., the apportionment clause was “inappropriate overreaction to the populist William Jennings Bryan.” (15)
Typically, those leaning right ideologically argue against the constitutionality of a wealth tax, and those who do typically lean more left. (16) There is no doubt that modern politics cast a shadow on the legal debates around this issue: Magness, a right-leaning commentator, argues that Biden’s wealth tax is based on an “economic falsehood,” effectively a political reason, and Hemel, more left-leaning, offers ways for Democrats to impose wealth-tax-like taxes if courts rule that Biden’s proposed one is unconstitutional. (17) As laid out, both sides have logical and tenable arguments that directly consult and interpret the language of the Constitution. The primary difference lies in their interpretation of precedent: those opposed rely on Supreme Court precedent; those in favor rely on precedent that refute that precedent.
It is worth noting that those against a wealth tax rely on precedent that exactingly defines direct taxation from vague constitutional language. Those drafting the Constitution were, in fact, unsure of the definition of a direct tax. Rufus King of Massachusetts asked the 1787 Constitutional Convention what exactly a “direct tax” meant, and nobody replied. (18) The firm definition of direct taxation including taxes on income relies on the sole opinion of five justices in 1985, four of whose peer justices dissented. (19) The logic to generate such a definition demanded a great deal of inference and assumption, even invention, as argued by Glogower, Gamage, and Richards, as well as Johnson and Kipp, yet the court has posited the definition as fundamentally constitutional. (20) Another Supreme Court could break precedent and revive other legal arguments that would change the definition of direct taxation.
However, precedence exists for a reason in common law systems, which prioritize fairness and consistency in the legal process. (21) Supporters of a wealth tax argue against precedent and say that the vagueness of direct taxation should equate to a looser definition rather than redefinition. (22) Breaking precedent of the highest court in America is, effectively by definition, a radical proposal. Though, the point still stands that apportionment is an antiquated concept and never was intended to interfere with federal taxation. (23) The prospect of breaking this precedent appears neither granted nor unduly radical.
Moore v. United States (2024), a pending court case, will decide the fate of the realization requirement and thereby the fate of a wealth tax. Moore, the petitioner, argues that taxes on their unrealized capital gains did not fall under the income as set out in the Sixteenth Amendment, and therefore was unconstitutional. (24) In the current Supreme Court, Moore is likely to win, and the realization requirement will be present-day precedent. (25) However, in another, more liberal Supreme Court, the decision would likely go the other way. (26) Indeed, the fundamental legal issues of a wealth tax are up to debate, and it seems that in the present and in the future, the Supreme Court will have supreme say on the tax’s constitutional viability.
Endnotes
(1) Isabelle Morales, "Biden's Tax on Unrealized Gains Will Hit Far More Taxpayers than He Claims," The Hill, accessed May 13, 2022, https://thehill.com/opinion/finance/3487486-bidens-tax-on-unrealized-gains-will-hit-far-more-taxpayers-than-he-claims/.
(2) U.S. Constitution, art. 1, sec. 9.
(3) Hylton v. United States, 3 U.S. 171 (1796).
(4) Id.
(5) Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895).
(6) Id.
(7) U.S. Constitution, amend. 16, sec. 1.
(8) Phillip W. Magness, "The Unconstitutional Tax on 'Unrealized Capital Gains,'" The Independent Institute, last modified March 14, 2023, https://www.independent.org/news/article.asp?id=14450.
(9) Daniel Hemel, "A Wealth Tax Is a Good Idea — If We Had a Different Supreme Court," The Washington Post, last modified October 26, 2021, https://www.washingtonpost.com/outlook/2021/10/26/wealth-tax-constitution-supreme-court/.
(10) National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012).
(11) Hemel, "A Wealth Tax Is a Good Idea," The Washington Post. Helvering v. Commissioner, 296 U.S. 85 (1935).
(12) Ari Glogower, David Gamage, and Kitty Richards, "Why a Federal Wealth Tax Is Constitutional," Articles by Maurer Faculty, 2021, 4-5. https://www.repository.law.indiana.edu/facpub/2959.
(13) Id, 8-9.
(14) Calvin H. Johnson and John T. Kipp, "A Wealth Tax Is Constitutional," American Bar Association, last modified August 8, 2019, https://www.americanbar.org/groups/taxation/publications/abataxtimes_home/19aug/19aug-pp-johnson-a-wealth-tax-is-constitutional/.
(15) Id.
(16) As seen in Magness and Hemel respectively. "Independent Institute Media Bias," AllSides, accessed November 13, 2023, https://www.allsides.com/news-source/independent-institute.
(17) Magness, “The Unconstitutional Tax,” The Independent Institute. Hemel, "A Wealth Tax," The Washington Post.
(18) "Alexander Hamilton And The Whiskey Tax," Alcohol and Tobacco Tax and Trade Bureau, last modified September 4, 2012, https://www.ttb.gov/public-information/special-feature#:~:text=At%20the%201787%20Constitutional%20Convention,Government%2C%20preferred%20the%20opposite%20opinion.
(19) Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895).
(20) Glogower, Gamage, and Richards, “Why a Federal Wealth Tax is Constitutional,” 8-9. Johnson and Kipp, “A Wealth Tax is Constitutional.”
(21) Cornell Law School, "Precedent," Legal Information Institute, accessed November 13, 2023, https://www.law.cornell.edu/wex/precedent.
(22) Glogower, Gamage, and Richards, “Why a Federal Wealth Tax is Constitutional,” 4.
(23) Id, 8-9.
(24) https://www.supremecourt.gov/DocketPDF/22/22-800/278983/20230906151353201_22-800%20tsac%20Meese%20Final.pdf.
(25) Hemel, "A Wealth Tax," The Washington Post.
(26) Id.
