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

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.

References

1. ^{^} came and went (www.axios.com)
2. ^{^} unveiled their proposal (www.axios.com)
3. ^{^} replaced with a surcharge on millionaire incomes (www.nytimes.com)
4. ^{^} soared by US$1.8 trillion during the COVID-19 pandemic (ips-dc.org)
5. ^{^} billionaires tend to pay very little in taxes (www.propublica.org)
6. ^{^} expert on tax policy (papers.ssrn.com)
7. ^{^} enjoyed substantial economic growth (www.cbpp.org)
8. ^{^} President Ronald Reagan dramatically slashed taxes on the wealthy (www.brookings.edu)
9. ^{^} have led to steadily rising income for the richest Americans and wealth inequality (www.thebalance.com)
10. ^{^} controlled 39% (www.cbpp.org)
11. ^{^} wealth (www.m1finance.com)
12. ^{^} taxes all income above $518,400 (www.nerdwallet.com)
13. ^{^} an additional 3.8% investment tax (www.thebalance.com)
14. ^{^} result in actual income tax rates being (www.propublica.org)
15. ^{^} reaches the root (theweek.com)
16. ^{^} strong (taxfoundation.org)
17. ^{^} arguments (nymag.com)
18. ^{^} unconstitutional (theconversation.com)
19. ^{^} apportioned equally among the states (constitutingamerica.org)
20. ^{^} is a tax on a thing (www.salon.com)
21. ^{^} because of the 16th Amendment (www.law.cornell.edu)
22. ^{^} only states and cities levy real estate taxes (www.financialsamurai.com)
23. ^{^} cite a small group (www.bloomberg.com)
24. ^{^} is sure to follow any attempt to enact a wealth tax (minnlawyer.com)
25. ^{^} an arduous amendment to the Constitution (www.archives.gov)
26. ^{^} seek to lift all boats (www.economist.com)
27. ^{^} have not seen their lot improve nearly as much (www.latimes.com)
28. ^{^} richest have (inequality.org)
29. ^{^} are paying higher tax rates (www.propublica.org)
30. ^{^} America’s billionaires saw their wealth increase $560 billion (www.forbes.com)
31. ^{^} were unemployed (www.bls.gov)
32. ^{^} depended on food donations (philanthropynewsdigest.org)
33. ^{^} wealth transfer tax (www.taxpolicycenter.org)
34. ^{^} article published (theconversation.com)