Sen. Elizabeth Warren’s proposed wealth tax is catching flack from the people it would hit hardest.
After former Starbucks CEO Howard Schultz called the plan “ridiculous,” former New York City Mayor Michael Bloomberg — a fellow multi-billionaire and potential 2020 presidential candidate — took issue with Warren’s proposal Tuesday during a trip to New Hampshire. While suggesting the country needed more progressive income tax rates, Bloomberg said people should also be incentivized to be more productive.
“We need a healthy economy and we shouldn’t be embarrassed about our system,” he said, according to The Boston Globe. “If you want to look at a system that’s non-capitalistic, just take a look at what was once, perhaps, the wealthiest country in the world and today people are starving to death. It’s called Venezuela.”
Bloomberg’s invocation of Venezuela bristled economists like Paul Krugman, who noted that Warren’s proposals were nothing like the authoritarian South American regime’s. And the Massachusetts senator herself went after Schultz and Bloomberg for their self-funded efforts to, as she put it, “keep a rigged system in place that benefits only them and their buddies.”
As opposed to taxing income, Warren’s wealth tax would apply to the total assets, such as real estate and stock holdings, of households worth more than $50 million, the richest 0.1 percent of Americans. The plan would hit household net worth between $50 million and $1 billion with an annual 2 percent tax. Wealth above $1 billion would be taxed each year at a 3 percent rate. Two University of California economists estimated that the proposal would result in $2.75 trillion in revenue over 10 years, which Warren says could be put toward rebuilding the middle class.
“We need structural change to get our economy and our democracy back on track — and no billionaire is going to get in my way of fighting for it,” Warren tweeted Tuesday afternoon.
That may be true. But in addition to the dispute over its merits, her wealth tax is facing another potential barrier: The U.S. Constitution.
“I think the Constitution lets you impose income taxes only, so it probably is unconstitutional” Bloomberg said Tuesday, according to CNN.
His comments followed a prominent Wall Street Journal opinion piece that made the same case last Friday.
While the 16th Amendment gives Congress the power to tax income, the Constitution otherwise prohibits “direct taxes” that are not apportioned among the states. In other words, the federal government is — or at least was — prohibited from directly taxing someone’s money, as opposed to a service or transaction, unless that tax is applied to each state in proportion to its population.
“That means a direct tax can raise the same amount from Connecticut as from Mississippi because they have roughly the same population (3 million), even though the first is the richest state in the union (with per capita income of more than $36,000) and the second is the poorest ($20,000),” Los Angeles Times business columnist Michael Hiltzik wrote last week.
The federal government does tax wealth already via the estate tax, which is taken when a person transfers their assets to an inheritor at the time of their death. The difference, however, is that the estate tax applies to a transaction.
Joe Bishop-Henchman, the executive vice president at the Tax Foundation, a right-leaning think tank, recently noted that the estate tax and corporate taxes have survived Supreme Court challenges as “indirect taxes on the transfer of wealth” and as “excise taxes on the privilege of doing business in the corporate form,” respectively.
“However, those taxes in some way involve a transaction, while the Warren wealth tax does not,” Bishop-Henchman wrote Friday.
“I’d argue that the term ‘direct tax’ is a proxy for incidence, as there’s solid evidence from the Founders that’s what they were getting at by using the term,” he continued. “Based on that and the precedents, my inclination is that Warren’s proposal would be found unconstitutional. But it’s not a slam-dunk case, as the precedents go both ways, and it’s not an area the Court has opined on for a long time.”
But as Bishop-Henchman noted, it’s hardly an open-and-shut case. A number of prominent legal and constitutional experts disagree.
In an Indiana Law Journal essay published last year, Indiana University law professor Dawn Johnsen and Duke University law professor Walter Dellinger wrote that the Founders were unclear from the beginning about what “direct taxes” actually meant and that the “erroneous” conventional wisdom has been framed by a single, closely decided 1895 Supreme Court ruling.
“The decision was so wrong and contrary to national interests that it directly inspired a constitutional amendment, one of only three such amendments in U.S. history,” Johnsen and Dellinger wrote, referring to the 16th Amendment, one of three amendments that were inspired by Supreme Court rulings.
Before that and since the 1895 ruling, they wrote that courts held a much more narrow interpretation of direct taxation. In a recent example, Supreme Court Chief Justice John Roberts ruled that the Affordable Care Act’s health care mandate — essentially an annual fine on those without insurance — was a tax, but did not constitute a direct tax. States and municipalities are also allowed to tax property on an annual basis.
In a letter to Warren’s office last week, Johnsen and Dellinger and nine other law professors across the country asserted that tax on net worth would also be constitutional.
“Constitutional text and history demonstrate that ‘direct’ tax is best interpreted as a narrow category that would not include a net worth tax. Because your proposal falls squarely within Congress’ broad taxing power and does not require apportionment, we believe it is constitutional,” they wrote.
Separately, six other law professors — including Yale’s Bruce Ackerman, who’s written at length about taxation and the Constitution — wrote to Warren’s office affirming her proposal’s constitutionality. The “key decision,” they wrote, was a 1900 Supreme Court ruling on an inheritance tax on property that “dramatically narrowed” the interpretation of direct taxation.
“Like your proposal, this wealth tax was progressive, increasing the rate from .75% to 3% as inherited property increased in value from $10,000 to $1 million,” the professors said. “Nevertheless, the Court unanimously held that the tax was ‘indirect.'”
Neither letters weighed in on whether Warren’s proposal was a good policy, but the professors argued that the conventional thinking around wealth taxes had been harmfully restrictive during a time of growing economic inequality.
“Devising a progressive tax system that effectively taxes the wealthy is notoriously difficult, but whether a wealth tax is part of that system should depend upon the policy choices of democratically elected representatives, not faulty constitutional understandings,” Johnsen and Dellinger wrote in their 2018 paper.