Sat Oct 30

Why taxing US billionaires’ wealth – as Biden tried to do – will never work

Written by: Beverly Moran, Professor Emerita of Law, Vanderbilt University

The speed with which a tax on billionaires came and went ^[1] as a means to pay for President Joe Biden’s economic agenda shows why it’s so hard to tax wealth in the U.S.

Democrats unveiled their proposal ^[2] on Oct. 27, 2021, and it was nixed that same day, replaced with a surcharge on millionaire incomes ^[3].

The idea of taxing the richest Americans’ fortunes has been batted around for some time, and perhaps with good reason from a tax perspective. The total wealth of U.S. billionaires soared by US$1.8 trillion during the COVID-19 pandemic ^[4] as of mid-August. And recent reporting has found that despite their massive riches, billionaires tend to pay very little in taxes ^[5].

As an expert on tax policy ^[6], I have observed that there’s a big obstacle standing in the way of a wealth tax: the Constitution.

Income and wealth inequality

Concerns about inequality have increased in recent decades.

Americans enjoyed substantial economic growth ^[7] and broadly shared prosperity from the end of World War II into the 1970s.

But in the 1980s, President Ronald Reagan dramatically slashed taxes on the wealthy ^[8] – twice – cutting the top rate on wages from 70% to 28%.

Studies have shown lower income and corporate tax rates, combined with other “trickle-down” policies such as deregulation, have led to steadily rising income for the richest Americans and wealth inequality ^[9].

The most affluent 1% controlled 39%^[10] of all wealth ^[11] – including all cash, real estate, stocks, bonds and other investments – in 2016, up from less than 30% in 1989. At the same time, the bottom 90% held less than a quarter of America’s wealth, compared with more than a third in 1989.

Currently, the federal government taxes all income above $518,400 ^[12] at 37% for single filers, with an additional 3.8% investment tax ^[13] on incomes over $200,000. Of course, as a ProPublica cache of tax documents shows, loopholes and tax dodges result in actual income tax rates being ^[14] significantly lower.

The problem with taxing wealth

Unlike an income tax, a wealth tax reaches the root ^[15] of both wealth and income inequality.

But there are strong ^[16] arguments ^[17] that a federal wealth tax is unconstitutional ^[18]. Wealth taxes violate Article I, Section 2, Clause 3 of the U.S. Constitution, which forbids the federal government from assessing “direct taxes” that aren’t apportioned equally among the states ^[19].

A direct tax is a tax on a thing ^[20], like property or income. An indirect tax is a tax on a transaction: for example, a sale or a gift.

The income tax is a direct tax and constitutional because of the 16th Amendment ^[21], which specifically allows income taxes without apportionment. As for property, you may notice that only states and cities levy real estate taxes ^[22]. In almost every case, the federal government cannot tax real estate or any other form of wealth absent a transaction.

Proponents of a wealth tax, such as U.S. Sen. Elizabeth Warren of Massachusetts, cite a small group ^[23] of law professors who back her claim that a wealth tax passes constitutional muster. But the argument against constitutionality is strong enough that a Supreme Court challenge is sure to follow any attempt to enact a wealth tax ^[24].

Barring a victory before the conservative-leaning Supreme Court or an arduous amendment to the Constitution ^[25], the federal government is shut out of taxing wealth.

A rising tide

I agree with progressive lawmakers that the United States should return to economic policies that seek to lift all boats ^[26].

Although American wealth and productivity have surged in the past 40 years, most Americans have not seen their lot improve nearly as much ^[27] as the richest have ^[28] – and are paying higher tax rates ^[29]. In 2020 alone, America’s billionaires saw their wealth increase $560 billion ^[30], even as tens of millions were unemployed ^[31] or depended on food donations ^[32] to get enough to eat.

The U.S. tax system is at least partly responsible for these gaps. While a wealth tax may not be a workable solution, there are other means, such as higher income tax rates for the well-to-do or a wealth transfer tax ^[33] that focuses on the transfer of wealth to a billionaire’s heirs. These approaches could not only help solve the problem of inequality but would pass legal muster too.

This is an updated version of an article published ^[34] on June 9, 2021.