Senator Elizabeth Warren has been the most creative policy thinker in Washington ever since she arrived on the scene little more than a decade ago. Unsurprisingly, her just-launched presidential campaign is based on an impressive array of careful and sometimes bold policy proposals that could move the country in a much better direction.
This column, however, is not necessarily an endorsement of Senator Warren’s presidential candidacy. At this early stage, I certainly hope that everyone will reserve judgment about the candidates and allow the (extremely) long campaign to reveal who would be the best nominee to unseat Donald Trump.
What I can do at this stage is weigh in on a legal controversy that has arisen regarding one of Warren’s most welcome proposals, which is an annual tax on extremely large concentrations of wealth.
Conservatives, in addition to their standard red-baiting strategy of referring to progressive tax proposals as collectivism or communism, think that they have a winning constitutional argument that would block Warren’s wealth tax from ever taking effect.
They are wrong, but even if they were right, that would still not prevent a version of Warren’s plan from being adopted. One way or another, if a future President Warren (or any other president) and majorities of Congress choose to tax wealth, the Constitution will not stand in their way.
At worst, conservatives’ constitutional argument might end up causing us to adopt a version of a wealth tax that is worse than Warren’s proposal—even from a conservative’s standpoint. Conservatives might then choose to cut off their noses to spite their faces, but again, they could not actually use the courts to prevent a wealth tax from being enacted.
Today, I will leave the economist side of my brain out of the conversation (surely to be pressed back into service to discuss the economic consequences of wealth taxes in future columns), preferring instead to focus only on this early controversy among legal scholars regarding whether Warren’s tax would be constitutional. To be clear, it would be.
Warren’s Wealth Tax Proposal
I should begin with a confession. Over the years that I have been teaching Federal Income Taxation as a law professor, I have never been able to satisfy myself that I fully understand the constitutional terms that I will try to explain below. Each time I have tried to engage with the relevant Supreme Court precedents and related literature, I have given up in frustration, typically finding myself saying something along the lines of, “Wait … what?”
It turns out that this is not a problem for income tax courses, however, because the Sixteenth Amendment to the Constitution swept that thicket of issues aside and explicitly permitted Congress to adopt an income tax in the form that we take for granted today. I also took comfort in the fact that no one else seemed able to understand (or at least clearly explain) the relevant constitutional provisions, in part because it was simply not necessary for anyone to do so. Although legal scholarship frequently explores minutiae, the pre-Sixteenth Amendment tax clauses are so incoherent—and so neutered by that amendment—that they have been largely unexplored.
Now, however, we have a political moment in which conservatives find themselves needing to make a Hail Mary constitutional argument against progressive taxation. There has thus been a sudden influx of on-the-fly commentary about the taxing clauses of the Constitution.
What is at issue? Senator Warren’s proposal, which she calls The Ultra-Millionaire Tax, would impose a tax rate of two percent each year on wealth in excess of $50 million up to one billion dollars, and it would add a one percent “billionaire’s surtax” on wealth greater than one billion dollars. Thus, no one with wealth under $50 million dollars would pay the tax at all, which (due to income inequality) exempts 99.9% of all people from the wealth tax.
Note that this is a tax on wealth, not income. That is, rich people would have to pay this amount on their total net worth, no matter their income level. Someone with high income can have low wealth, and vice versa, although it is unusual to have high wealth and low income, simply because the assets that constitute wealth—stock, bonds, real estate, and so on—tend to generate income.
As I noted above, there are economic issues that this tax plan implicates that I will not address here. The point is that the tax is designed only to collect revenue from people worth at least $50,000,001 dollars, and only on the amount that their wealth exceeds fifty million. Thus, the person with that extra one dollar of wealth would pay two percent of the dollar that his wealth exceeds fifty million. That is, his tax bill would be two cents. (The tax would not substitute for the income tax, however, so unless the wealthy person owns assets that produce no income, he would still pay income tax as appropriate.)
Direct and Indirect Taxes
Where are the strictly legal issues hiding? The Constitution distinguishes between two types of taxes, direct and indirect. What is the difference? As I noted above, no one seems to be sure. True, the occasional conservative blogger might claim to have the key to understanding the difference, but even then we see a concession that, “[a]dmittedly, the line between direct and indirect taxes was not always crystalline.” That understatement deserves some kind of award.
The Constitution’s text is unhelpful, because section 9 of Article I says only that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” So we know that a capitation—that is, a per-person tax—is one kind of direct tax, but we honestly have only the most limited clues as to what else would count as a direct tax. Clearly, the framers thought that there must be others, but they did not provide guidance.
An infamous Supreme Court case from the immediate pre-Lochner era saw a divided court hold that a tax on the earnings from property—not on the property itself, but on the income that the property generates—was a direct tax. I will leave aside why most commentators agree that the Court was simply wrong in that decision, because the more interesting question here is what would happen if that majority’s conclusion were to apply to Warren’s wealth tax.
Warren herself is a former law professor, and she is thus very careful about these things. Along with her announcement of her Ultra-Millionaire Tax proposal, therefore, her office issued two short letters co-signed by a Who’s Who of American constitutional law professors. Both letters conclude as a constitutional matter that a wealth tax is not a direct tax that would need to be apportioned.
To me, this controversy about direct-versus-indirect taxation is analogous to the debates over the Commerce Clause, which gives Congress power to regulate only interstate commerce. The best approach that I have seen to understanding the Commerce Clause in the current context says that essentially all commerce has become interstate commerce, because the integrated nature of modern economies means that virtually every economic transaction is inescapably an interstate transaction.
That would mean that the Commerce Clause no longer has any force, but so what? If the Framers said that Congress cannot regulate intrastate commerce, but over time intrastate commerce simply ceased to exist, then that merely means that Congress can regulate all of the commerce that is transacted in the real world. That is not defiance of the Framers’ intent but merely recognition that times have changed.
It is not clear that anyone ever knew what a direct tax was, but it would certainly be appropriate today to say that all of the taxes that we can describe are ultimately indirect taxes. Again, that does not misread the Constitution; it merely says that some provisions of the Constitution have been effectively nullified by changing times.
Even short of that, however, as far as Warren’s proposal itself goes, the estate tax is also a wealth tax and has never been struck down for being a direct tax, even after being on the books for more than a century. Where is the constitutional difficulty?
What About Apportionment?
Because no constitutional analysis is air-tight, however, and especially because the recent appointment of aggressively right-wing justices to the Court brings with it the possibility that the empowered conservative majority could bring back Lochner and worse, it is worth thinking about what would happen if conservative legal advocates succeeded in getting Gorsuch, Kavanaugh, et al. to invalidate wealth taxes.
The key here is that the Court cannot invalidate a wealth tax. It can only say that a wealth tax is a direct tax, not an indirect tax, and thus that it must be apportioned. But again, so what? What is apportionment, and why does it matter?
Apportionment means that the tax must be levied in proportion to each state’s representation in the House of Representative. Because House seats are set roughly in proportion to population, this means that a direct tax must be levied such that the ratio of the money collected from each state to the total revenue collected by the tax is equal to the ratio of each state’s population to the total population of the country. Maryland’s population, for example, is currently just under two percent of the total population, so an apportioned tax would have to collect that percentage of its revenue from Marylanders.
The Constitution requires only that indirect taxes be “uniform,” which means that indirect taxes cannot differ as applied from one state to another. Importantly, the Constitution says nothing to require that direct taxes be uniform.
This means that, even if the Supreme Court’s conservative bloc were to hold (wrongly, in my view) that wealth taxes are direct and thus must be apportioned, a President Warren might respond: “I can work with that.” All she would need to do is to sign a law that is rewritten to be apportioned.
Fallback Law and the Wealth Tax
To be sure, an apportioned wealth tax would be, to be blunt, a relatively stupid way to impose a progressive tax. But if the non-stupid way to do this is prohibited by the Supreme Court’s conservatives, the relatively stupid approach would still be better than nothing. In a companion column today on Dorf on Law, I will explain why the apportioned approach would be less than ideal as a matter of policy, but for now, the point is that it would be constitutional.
A more practical question arises regarding the process of writing the relevant legislation. Why pass a wealth tax and then wait for it to be declared a direct tax, only then to go back and pass a new version that provides for apportionment? Is there not some better way, some method to cover the bases from the beginning?
The answer is yes. My Verdict colleague Michael Dorf has written about the concept of “fallback law,” which is legislation in which Congress anticipates the possibility that the courts will strike down all or part of a statute. This implicates notions of both severability and substitute provisions, with the latter being relevant here. Warren could ask Congress to pass her wealth tax with a fallback version that reconstitutes the tax so that it can be apportioned, just in case the preferred version is deemed a direct tax.
Interestingly, Professor Dorf’s analysis notes that Congresses might strategically include fallback provisions that they suspect the Supreme Court will find unappealing, which could be described as attempted legislative coercion: “You better not find this provision unconstitutional, Supreme Court, because the alternative will not please you!” In some instances, he notes, that could raise its own set of constitutional issues.
As I noted above, even though conservatives generally oppose wealth taxes, they are likely to think that apportioned wealth taxes are even worse, because they are not uniform (and because they are simply a lot more complicated). But even if I am right about that, Warren could not be accused of spiking her proposal with an unappealing fallback provision. She would, after all, simply say that she wants to pass a wealth tax that is uniform, but if she cannot do that, she wants to pass a wealth tax that complies with the apportionment requirement. That is not coercion. It is fealty to the Constitution.
In short, no one truly knows whether a wealth tax is a direct tax for constitutional purposes, mostly because no one seem to know what a direct tax is. But it is wrong to say, as some commentators have, that a wealth tax would be unconstitutional. At worst, it would be unconstitutional only if it were not apportioned.
That might not be the best way to tax wealth, but it is better than allowing wealth to continue to be concentrated in the hands of the ultra-rich.
