The Constitutionality of a Wealth Tax in the United States
Introduction
Since the Industrial Revolution saw a sharp rise in the wealth gap in the US, there have been tensions between the rich and the poor. How much do the wealthy “deserve” their money? Do they owe anything to society? In an age when the richest members of society have hundreds of billions of dollars in assets, these questions are more relevant than ever.
As inequality remains high, moral debates around redistribution and how to pay for different welfare programs have been on the rise. Elizabeth Warren famously proposed a “wealth tax” during her 2020 presidential campaign, and the idea quickly gained support — according to a Reuters poll [1], 64% of Americans, including 53% of Republicans, favor some form of a wealth tax on the ultra-rich. But such a policy would be a dramatic shift for a country that has long valued property rights and the (often unattainable) ideal of a deserved, meritocratic rise to the top.
Furthermore, it is not clear that a federal wealth tax is constitutional — the Framers severely limited Congress’s taxing powers, and today’s income tax code operates under the Sixteenth Amendment, which allows income taxes but not wealth taxes [2]. Given the relevant constitutional provisions and Supreme Court precedents, it seems apparent that without a constitutional amendment to allow it, a wealth tax would be unconstitutional.
Historical Context
From opposition to the Stamp and Townshend Acts of the 1760s to the famous Boston Tea Party, a protest against the 1773 Tea Act, America was founded in direct opposition to what was seen as unjust taxation. Splitting from an imperialist empire under the mantra “no taxation without representation,” the young United States struggled with the role of the federal government in taxation, and the adoption of the so-called “Whiskey Tax” in 1791 led to a three-year armed rebellion that was eventually put down by the federal government.
The US saw its first income taxes during the Civil War, when the Union was in desperate need of funding. In 1861, a progressive income tax was introduced. Then, in 1895, the Supreme Court ruled in Pollock v. Farmers' Loan & Trust Co [3]. that income taxes were unconstitutional if they were not apportioned among the states based on population — per Article I, Section 2 of the Constitution, “direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers.”[4] The Sixteenth Amendment (1913) — introduced as part of a failed political stunt by a Nebraska senator who wanted to appease progressives without raising taxes, thinking the amendment would never be ratified — changed this, allowing income taxes that are not necessarily apportioned among the states by population [5] and clearing the way for future federal tax regimes. The 1913 Revenue Act, the ancestor of the Internal Revenue Code, saw the adoption of income tax “brackets.” Since then, Congress has changed how income taxes work several times, but it has always been taxing just that — income, not wealth.
Legal Framework for Taxation
Several constitutional provisions restrict the federal government’s taxation power. Article I gives Congress the power to tax [6]. Originally, these taxes had to be apportioned among the states by their population, but the Sixteenth Amendment removed this requirement for income taxes: “The Congress shall have the 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] But even after the Sixteenth Amendment, several constitutional limits on Congress’s taxing power remain.
The due process clause of the Fourteenth Amendment which reads, in part, that “[no State shall] deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws”[8] can be interpreted as prohibiting excessive or “unfair” taxation, since taxation, as viewed by some (notably the libertarian philosopher Robert Nozick), is nothing but the government “confiscating” property.
The Fifth Amendment explicitly protects property rights: “[No person shall] be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”[9] One could argue that the Takings Clause prohibits a wealth tax — after all, it is taking private property for public use, and a wealth tax is not covered by the Sixteenth Amendment.
Finally, the Eighth Amendment’s prohibition of “excessive fines”[10] leads to the concept of “punitive taxation” — is a “wealth tax” really just an excessive “wealth fine”? Understandably, this is the weakest legal argument against taxation, since it leads us down quite a slippery slope — if a wealth tax is punitive taxation, then where do we stop? Are other forms of taxation also not then “excessive fines”?
Case Law
Since a wealth tax has never been implemented in the United States, much of the case law focuses on income taxes. As discussed previously, in Pollock, the Court ruled that income taxes violated Article I, Section 2, but this was overturned by the Sixteenth Amendment in 1913. In Brushaber v. Union Pacific Railroad Co. (1916) [11], the Supreme Court affirmed that income taxes no longer needed to be apportioned among the states by population, since the Sixteenth Amendment made income taxes an exception to the uniformity clause of Article I, section 8. Crucially, it also rules that income taxes do not violate the Fifth Amendment. So while the reasoning for the constitutionality of an income tax despite the uniformity clause centers around the Sixteenth Amendment, which does not apply to wealth taxes, the argument for income taxes not violating the Fifth Amendment is more general; after all, if income taxes don’t violate the Fifth Amendment, then why should a wealth tax?
In Eisner v. Macomber (1920) [12], the Supreme Court ruled that a dividend distribution [13] where no actual cash is received is not taxable income under the Sixteenth Amendment. This precedent suggests that wealth held in the form of stocks and other non-cash assets is similarly not taxable — after all, if non-cash dividend distributions are not taxable income, then how can it be constitutional to tax simply holding non-cash assets like stocks or real estate? This is important, because most of the ultra-wealthy, whether entrepreneurs or hedge fund managers, have much of their net worth in stocks and other financial assets.
The Supreme Court is now set to hear Moore v. United States, a case granted certiorari from the Ninth Circuit that will determine whether the Sixteenth Amendment authorizes Congress to tax unrealized income without apportionment among the states. If the answer is yes, this would likely overturn the precedent Eisner and allow the taxation of unrealized capital gains, which are not currently federally taxed. It is possible, however, that the increasingly conservative-leaning Court will side against the government, which would heavily suggest that this court would not uphold the constitutionality of a wealth tax.
Conclusion
Brushaber nullifies the Fifth Amendment objection to wealth taxes, but that leaves two strong constitutional objections — the uniformity clause and the Fourteenth Amendment. Precedents like Polock show that, absent the Sixteenth Amendment, taxes must be apportioned among the states by population under Article I, Section 8. The Sixteenth Amendment made an exception for income taxes but makes no mention of wealth taxes.
In Commissioner v. Glenshaw Glass Co. (1955) [14], the Court articulated the currently accepted definition of taxable income under the Sixteenth Amendment: “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” Under this framework, only increases in wealth can be taxed — not wealth itself. The conservative-leaning Supreme Court is unlikely to overturn this precedent, so barring a dramatic change in the makeup of the Court paired with a new interpretation of the Sixteenth Amendment verging on Justice Scalia’s pet peeve “judicial activism,” a constitutional amendment will almost certainly be necessary before a wealth tax that is not distributed among the states by population can be implemented. IAnd in today’s increasingly polarized political climate, that is next to impossible.
Bibliography
Howard Schneider and Chris Khan, “Majority of Americans favor wealth tax on very rich: Reuters/Ipsos poll,” Reuters, January 10, 2020, https://www.reuters.com/article/us-usa-election-inequality-poll/majority-of-americans-favor-wealth-tax-on-very-rich-reuters-ipsos-poll-idUSKBN1Z9141.
Income taxes tax income — things like wages and realized capital gains — while wealth taxes tax wealth, regardless of how much income a person has during the relevant period.
Pollock v. Farmers' Loan & Trust Co, 157 U.S. 429 (1895).
U.S. Constitution, art. I, sec. 2, cl. 3.
U.S. Constitution, amend. 16.
U.S. Constitution, art. I, sec. 8, cl. 1.
U.S. Constitution, amend. 16.
U.S. Constitution, amend. 14, sec. 1.
U.S. Constitution, amend. 5.
U.S. Constitution, amend. 8.
Brushaber v. Union Pacific Railroad Co., 240 U.S. 1 (1916).
Eisner v. Macomber, 252 U.S. 189 (1920).
income from dividends public companies pay to shareholders
Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)