Using Legalistic Lawlessness to Protect the Wealthy from the Indignity of Paying Taxes: Part Two of Two

Posted in: Tax and Economics

Could the Supreme Court suddenly strike down tax laws that have existed without challenge for decades? We know that the Court can do pretty much anything it wants, and the current Court seems especially eager to take a buzzsaw to decades of precedent. And given the centrality of anti-tax dogma to American movement conservatism, there is every reason to think that taxes will soon be on the Court’s radar screen.

The only questions are how the Supreme Court might go about this task, and how far they dare to go. The answers are important—and troubling. The pieces are already being put in place for Republicans to use the courts to do what they cannot do legislatively (or are unwilling to do openly), which is to permanently undermine the government’s ability to raise revenues to address social needs.

Taxes are, admittedly, often a dry topic. Today, however, they are one of the lynchpins of the ongoing Republican effort to give to the rich and to take from everyone else.

Can Every Tax Be Declared Unconstitutional?

What arguments might the conservatives on the Supreme Court use to destroy the tax system? In a Verdict column last week, I described a baseless attack on a recent proposal from Democrats, who would have peeled back a particularly egregious tax giveaway to the rich. I argued that the Supreme Court would have to be particularly inventive—and shameless—to revive a wholly discredited (and later repudiated) Lochner-era decision to undo what the Democrats had proposed.

The Democrats now seem to have abandoned their proposal. Even so, I followed up on last week’s column earlier this week by publishing Part One of this two-part series, because it is important to discuss how the Republican response to that specific tax proposal could be used in a more thoroughgoing attack on progressive taxes across the board.

In Part One, I first noted that even if the Democrats had passed their Billionaires Tax, Republicans would have repealed that law within nanoseconds of retaking control of the federal government. The Billionaires Tax itself is thus at most a sideshow, because it would not have survived long enough to reach the Supreme Court. I then explained in more detail why the abandoned Lochner Court case (Eisner v. Macomber) should remain dead as a matter of constitutional doctrine, which is important because conservatives seem intent on reanimating that decision’s lifeless body for use in other tax cases.

Here in Part Two, I want to extend the analysis to show how much of a stretch it would be to say—as conservatives are saying—that all taxes on wealth are unconstitutional and that all progressive taxes are taxes on wealth. Importantly, reviving Macomber could be only one part of the right’s effort to defund the government.

This is an example of what I call “legalistic lawlessness,” in which the Court’s conservatives would do to tax doctrine what they have done in other areas of the law (voting rights, gun control, affirmative action, reproductive rights, and on and on). Rather than admitting that they are being unprincipled politicians in robes, they are much more likely to pretend that “the Constitution made us do it.”

Of Velocity, Distance, and the Constitution

Many readers might dimly recall a high school science class in which the teacher explained the difference between distance and speed. The two concepts are related in a very specific way, which is that speed (or velocity) is an expression of the distance that a body travels over a period of time. One mile is a distance, one mile-per-hour is a speed.

Now imagine that someone were to argue that the Constitution prevents the government from passing and enforcing speed laws on the highways. Where could that argument possibly come from? This is in some ways beyond fanciful, but the exercise will be worth the effort.

Supreme Court precedent holds that there is a “right to travel” embedded in the Constitution. That, my hypothetical advocate tells us, means that no government can stop a person from traveling from one place to the next, no matter the distance. Therefore, governmental limitations on anything to do with distance must surely violate the Constitution.

And look! Speed limits are an effort by the government to tell people that they cannot travel in excess of certain velocities—and velocities measure distance per unit of time. If the Constitution prevents any government from limiting someone’s ability to travel any distance that he freely chooses to travel, the argument would continue, that must mean that no government can limit distance-per-time, either. “Distance is right there in the definition, and you can’t limit distance!”

Again, this is all silly, and such a case would not only lose in any competent court of law but would probably lead to sanctions on any lawyer who dared to file it. Not only does the Constitution’s right to travel not mean what the hypothetical claimant purports (as I will explain below), but there can be no doubt that velocity and distance are different concepts.

To put the latter point clearly, even if the Constitution somehow prevented governments from limiting the distances that people travel, it is fully permissible to limit how quickly they get there.

How is this analogous to anti-tax claims under the Constitution? Conservatives are now wrongly claiming that any tax on wealth is per se unconstitutional, which is surprisingly analogous to a facile claim that the Constitution prevents limitations on the distances that people can travel. I will return to that idea soon enough, but first, we must talk about income and wealth.

Any Limits on Taxing Wealth Do Not Apply to Taxes on Incomes

The difference between wealth and income is analytically identical to the difference between distance and speed. Wealth can be measured at a moment in time, whereas income can only be measured per unit of time. As I described in my column last week, the so-called Haig-Simons definition of income (which is the universally accepted, nonideological standard used for both economic and tax purposes) says that income is equal to the sum of two things: how much a person consumes per unit of time plus how much their wealth changes during that time.

Setting aside the consumption element, then, the definition of income directly depends on wealth in precisely the same way that the definition of velocity depends on distance. So even though income is not the same thing as wealth, a motivated conservative could argue: “It’s right there in the definition. A tax on income is a tax on wealth!”

That might sound farfetched, but that is in fact precisely how some analysts responded to the Democrats’ Billionaires Tax proposal. That proposal would have partially repealed the “realization requirement,” a statutory sop to the wealthy that Congress passed decades ago to allow people who own assets not to pay taxes on their unearned income until they sell the assets—even though owning those assets has made them wealthier, that is, the changes over time in the values of the assets have provided their owners with income.

Why does this matter? During her presidential campaign in 2019 and 2020, Senator Elizabeth Warren argued in favor of a genuine wealth tax—that is, a tax that is directly levied and computed on the basis of wealth as properly measured, not on income. Specifically, she would have taxed only wealth above $50 million, but she quite deliberately wanted to tax wealth, not income.

In a positive assessment of that proposal at the time, I wrote:

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.)

The problem with my parenthetical comment is that the wealthy in fact do not “pay income tax as appropriate.” The entire point of the now-abandoned Billionaires Tax was to address the fact that the ultrarich pay neither wealth nor income taxes. And because the Sixteenth Amendment explicitly created a clear constitutional field for income taxes, there should have been no barrier at least to taxing income, whether it is realized or not.

Yet one conservative professor tried to argue this past summer that a Billionaire’s tax would be a wealth tax … sort of. He wrote that it is wrong to argue that “unrealized increases in wealth are the same as income“—even though that is exactly what they are. Other than an incorrect description of the Macomber case, however, he offered no argument against the idea that income and wealth are different things, seeming to imply that taxing “increases in wealth” is the same thing as taxing wealth itself. (Otherwise, why not just call it income?) And by that logic, regulating velocity is the same thing as regulating distance!

Another professor was even more blunt, saying that “the wealth of the very richest Americans consists mostly of appreciated stock, which would remain subject to the tax under this [proposal].” No, their wealth would not be subject to tax. Their income—the change in their wealth—would be.

The Misanalysis Above is, Incredibly, the Strongest Version of the Anti-Tax Argument

Conservatives (and some others) apparently believe that it is possible to win the constitutional argument by saying nothing more than: “This is a tax on wealth.” Again, there is no per se constitutional limitation on taxing wealth, but we are still setting that matter aside.

In fact, it apparently is not even necessary for some people to argue (as above) that taxing income automatically taxes wealth because it taxes changes in wealth. Apparently, it is enough simply to say the word “wealth” as an incantation when describing a tax, then call it a day.

In last week’s column, I tried to bat down the most expansive version of such an argument. One could, after all, claim that every tax is a tax on wealth, because the very fact of paying taxes necessarily makes a person less wealthy. If I pay, say, two thousand dollars in income taxes, my wealth ends up two thousand dollars lower than it would have been. And this illogic would be boundless, because even a sales tax leaves us with less money than we would have had if there were no tax.

Does that make every tax a tax “on wealth”? Of course not. A property tax is assessed on the value of property. (That is a form of a wealth tax, by the way, that has never been challenged as unconstitutional.) Sales taxes are assessed on the value of the items sold. Income taxes are assessed on incomes. That paying them causes wealth to go down does not make them taxes on wealth.

Even more surprising, one of the legal scholars quoted above also offered the puzzling argument that the financial status of the taxpayer determines whether something is a wealth tax. While being very clear that he would hold the Billionaires Tax to be constitutional if it were up to him, he expressed concern that the Supreme Court as currently constituted (with six of the most right-wing justices imaginable controlling the outcome) would come out the wrong way.

Nonetheless, as this professor explicitly described the Billionaires Tax as a wealth tax, he offered this further rationale:

The proposed billionaire tax depends not only on a taxpayer’s unrealized gains but also—as the name implies—on her wealth. The tax kicks in only if a taxpayer’s wealth—the value of her real and personal property—passes the $1 billion threshold.

So the tax “depends” on the taxpayer’s wealth, and that makes it a wealth tax? Even though the tax itself is computed by measuring income, the claim is that the tax becomes a wealth tax because only wealthy people pay it. This would have truly startling implications, because it would mean that even if Congress passed a tax on realized income but imposed it only on billionaires, then even that would be a “tax on wealth.”

Conservatives have long derided the estate tax (another tax on wealth that has never been struck down as unconstitutional) as a “death tax,” arguing that the label is accurate because only people who die are subject to the estate tax. But even though everyone dies eventually, more than 99 percent of people who die pay no estate tax, because it is a tax on the value of a decedent’s estate, not on death itself. Similarly, if a billionaire followed Mitt Romney’s advice and put her money into assets that did not produce income (such as art that fails to rise in value), she would not pay the Billionaires Tax, even though her wealth is above the threshold.

The factors that Congress uses to determine who is and is not subject to a particular tax are not relevant to whether something is a wealth tax. Even though richer people tend to engage in more air travel, for example, that does not mean that an excise tax on airplane tickets is a tax on rich people. Property taxes are not taxes on being wealthy, they are taxes on the value of a particular kind of wealth. And under the income tax, the top personal rate currently applies only to couples with taxable income in excess of $628,300, almost all of whom have high wealth. That does not make the income tax a tax on wealth.

To put it differently, the Billionaires Tax would have been a tax on the income of some wealthy people, which is not a tax on wealth. And even if it were, the Sixteenth Amendment would supersede any previous constitutional limitations, because it expressly authorizes taxes on income without any further requirements. Full stop.

“Is It a Wealth Tax?” Is Not Even the Right Question

As I noted above, this entire argument about what constitutes a wealth tax often presumes that the constitutional analysis would be simple: If it is a tax on wealth, it will be struck down. That, however, is plainly false.

To go back to my hypothetical argument above, regarding limiting speeds versus distances, it is important to remember that the premise of the argument—that “freedom to travel” prevents Congress from limiting how far people can travel—is itself silly. Under current precedent, the Constitution prohibits “the right to enter one state and leave another[,] to be treated as a welcome visitor[, and] to be treated equally to native-born citizens.” Calling these collectively a right to travel is accurate, but they have nothing to do with limitations on distances traveled.

Similarly, it is important to understand that even if a tax is deemed to be a wealth tax, that does not mean that it is unconstitutional. As I explained in a Verdict column almost three years ago, a tax must be deemed to be a “direct tax”—which no one has ever been able to define, not even the people who wrote it into the Constitution—before it becomes subject to any constitutional limitations. And even if a tax is deemed to be a direct tax, Congress can still enact it, only with the added requirement that it must be “apportioned.”

Those details are available in that earlier column, but the point here is that it is simply wrong to say that “the Supreme Court will be able to strike down any tax that it decides to call a wealth tax.” That claim not only skips some important steps, but the worst that could happen is that Congress—not the Court—could decide as a policy matter that it is not worth apportioning a tax and thus might choose not to enact the tax at all.

Even so, when I was drafting Part One of this column, I unthinkingly wrote that “the Roberts Court is already being encouraged to think about all taxes as taxes on wealth, which would effectively make all taxes unconstitutional, not just a Billionaires Tax.” Again, deeming all taxes to be wealth taxes would not magically turn them into constitutional violations. But getting into the weeds on these questions can narrow one’s focus: “If my side loses this sub-argument, then we lose the entire argument.” Thankfully, I caught my error before publication, because that is not how the constitutional analysis works.

In the end, however, none of that is reason to take comfort. The confusion generated by the scholars that I quoted in this column is surely enough to confuse the media, so that the argument would indeed quickly become that “this tax is unconstitutional because it’s a wealth tax.”

Normally, we count on Supreme Court justices not to be swayed by such pedestrian confusions. When the Court sets its mind to reaching its preferred conclusion, however, it can find it quite useful to rely on a series of illogical and incorrect assumptions. “A tax on unrealized income is a tax on wealth—and as everyone knows, taxes on wealth are unconstitutional!” Constitutional fog can be politically quite useful.

In the end, then, we can expect that the post-democratic world in which we will soon live will include a concerted effort by Republicans to get rid of all progressive taxes. That which congressional Republicans will find too inconvenient or unsightly to do legislatively, the Court can do under the guise of legalistic lawlessness. It will all look very elegant, even as it radically changes our society for the worse.

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