War­ren ‘wealth tax’ idea is both le­gal, nec­es­sary


Sen. El­iz­a­beth War­ren (DMass.), a newly de­clared pres­i­den­tial can­di­date, has turbocharged the pro­gres­sive at­tack on in­come in­equal­ity with a pro­posal for a “wealth tax” aimed at Amer­i­cans with net worth of more than $50 mil­lion.

War­ren her­self hasn’t is­sued many de­tails of her plan. But ac­cord­ing to UC Berke­ley econ­o­mists Em­manuel Saez and Gabriel Zuc­man, who ad­vised her on the pro­posal, the tax would be 2% on net worth above $50 mil­lion and an­other 1% on net worth above $1 bil­lion. They say it would af­fect about 75,000 U.S. house­holds, or less than 0.1% of the to­tal, and raise $2.75 tril­lion over 10 years. That’s about 0.1% of gross do­mes­tic prod­uct per year.

War­ren’s an­nounce­ment, made a week ago via Twit­ter, is cer­tain to be met with two big ques­tions: Is a wealth tax con­sti­tu­tional, and is it nec­es­sary? Le­gal schol­ars say the an­swer to the first is yes, and econ­o­mists (and the ev­i­dence of your own eyes) say the an­swer to the sec­ond also is yes.

Let’s take the ques­tions in turn.

The no­tion that a wealth tax is un­con­sti­tu­tional de­rives from a pro­vi­sion of the Con­sti­tu­tion pro­hibit­ing “di­rect” tax­a­tion un­less it’s “ap­por­tioned among the states.” That’s gen­er­ally taken to mean that the amount raised from each state must be pro­por­tion­ate to its pop­u­la­tion.

That means a di­rect tax can raise the same amount from Con­necti­cut as from Mis­sis­sippi be­cause they have roughly the same pop­u­la­tion (3 mil­lion), even though the first is the rich­est state in the union (with

per capita in­come of more than $36,000) and the sec­ond is the poor­est ($20,000).

But two le­gal schol­ars say this con­sti­tu­tional in­ter­pre­ta­tion is wrong. They’re Dawn John­son of In­di­ana Uni­ver­sity and Wal­ter Dellinger, a for­mer U.S. solic­i­tor gen­eral, of Duke Uni­ver­sity. Their anal­y­sis ap­peared last year, and is re­garded as the lead­ing work on the is­sue, though their po­si­tion isn’t unan­i­mously held. (Thanks to Bruce Bartlett for bring­ing it to my at­ten­tion.)

John­son and Dellinger dis­miss the con­sti­tu­tion­al­ity is­sue as “con­ven­tional wis­dom” that is ca­su­ally re­peated but is the prod­uct of “faulty con­sti­tu­tional un­der­stand­ing.” It’s par­tially the re­sult of a Supreme Court rul­ing in 1895 known as Pol­lock that was nar­rowly — and they say wrongly — de­cided, and that has been un­der­mined by a string of sub­se­quent Supreme Court de­ci­sions.

It’s also gen­er­ally dis­dained by le­gal au­thor­i­ties. Among them is Bruce Ack­er­man of Yale Law School, who wrote in 1999 that be­fore Pol­lock, the court used a very nar­row def­i­ni­tion of “di­rect tax,” and has re­turned to that nar­row view since. As a unan­i­mous court de­clared in 1983, he noted, “Congress’ power to tax is vir­tu­ally with­out lim­i­ta­tion.”

The “di­rect tax” lan­guage in the Con­sti­tu­tion, John­son and Dellinger ob­serve, was murky even to the drafters.

The Con­sti­tu­tion refers ex­plic­itly only to a “cap­i­ta­tion” or head tax, which is levied on each in­di­vid­ual and thus can be eas­ily ap­por­tioned by pop­u­la­tion. The au­thors as­sert that the clause wasn’t the prod­uct of “any prin­ci­pled de­ci­sion to limit Congress’s au­thor­ity to tax in­come, prop­erty, or wealth.”

In any event, the court re­jected Pol­lock only a few years later, by up­hold­ing an es­tate tax and a gift tax — that is, a tax on net worth. Af­ter the 16th Amend­ment, which de­clared an in­come tax con­sti­tu­tional, was rat­i­fied in 1913 as a re­sponse to Pol­lock, dis­cus­sions of the con­sti­tu­tion­al­ity of taxes other than the head tax dropped off the Supreme Court docket.

Still, since de­bate over the con­sti­tu­tion­al­ity of a wealth tax might gum up the process of en­act­ing one, it might make sense to avoid the is­sue by strength­en­ing taxes that al­ready have passed the court’s muster. That’s the ar­gu­ment of Mi­randa Perry Fleis­cher of the Uni­ver­sity of San Diego.

Fleis­cher pro­poses sev­eral sec­ond-best al­ter­na­tives to short-cir­cuit the de­bate. These in­clude rais­ing the tax rate on cap­i­tal gains, which is lower than that on or­di­nary in­come, and tax­ing cap­i­tal gains at death — rather than al­low­ing heirs to avoid em­bed­ded cap­i­tal gains tax by step­ping up their cost ba­sis upon the be­quest.

Un­der cur­rent law, if a tax­payer bought, say, a stock at $100 and leaves it to heirs when it’s worth $1,000, that $900 gain never will be taxed. Fleis­cher pro­poses to levy the tax when the tax­payer dies. Since the Supreme Court hasn’t ob­jected to es­tate taxes, prob­lem solved.

That brings us to the ques­tion of whether a wealth tax is needed. The an­swer here is un­mis­tak­ably yes. The con­cen­tra­tion of wealth in Amer­ica has reached lev­els that make the gilt of the 19th cen­tury Gilded Age look like dross. There’s sound eco­nomic and so­cial sense in tax­ing the hell out of ex­ces­sive in­comes and ex­ces­sive wealth.

As Saez and Zuc­man ob­serve, the top 0.1% to­day con­trol al­most as much wealth as the bot­tom 90%. Wealth dis­par­ity on this scale has a dis­tinctly cor­ro­sive ef­fect on so­ci­ety and democ­racy. As po­lit­i­cal econ­o­mist Ben­jamin Fried­man wrote in 2009, its “grave moral con­se­quences” in­clude “racial and re­li­gious dis­crim­i­na­tion, an­tipa­thy to­ward im­mi­grants, [and] lack of gen­eros­ity to­ward the poor” — all fea­tures of our cur­rent po­lit­i­cal land­scape.

That’s not even to men­tion the eco­nomic con­se­quences of plac­ing so much wealth in the hands of peo­ple who can’t use it pro­duc­tively, while the ma­jor­ity of Amer­i­cans strug­gle to make ends meet on work­ing-class wages.

The Found­ing Fa­thers were un­nerved by this very phe­nom­e­non. Thomas Jef­fer­son wrote to James Madi­son in 1785, “when­ever there is in any coun­try, un­cul­ti­vated lands and un­em­ployed poor, it is clear that the laws of prop­erty have been so far ex­tended as to violate nat­u­ral right.”

In his au­to­bi­og­ra­phy, Jef­fer­son wrote of the bills he had ad­vo­cated or passed to form “a sys­tem by which ev­ery fi­bre would be erad­i­cated of antient or fu­ture aris­toc­racy; and a foun­da­tion laid for a govern­ment truly repub­li­can.” His goal was to “pre­vent the ac­cu­mu­la­tion and per­pet­u­a­tion of wealth in se­lect fam­i­lies.”

Per­haps for­tu­nately, we don’t have to go far to see and hear these con­se­quences spelled out. The Trump ad­min­is­tra­tion has done much of the work for us, es­pe­cially in its re­sponse to the pain it’s im­posed on govern­ment work­ers de­prived of pay­checks by the govern­ment shut­down.

The su­per-rich haven’t been shy about speak­ing up for their pre­rog­a­tives. Asked at the Davos eco­nomic con­fer­ence this month about the sug­ges­tion by Rep. Alexan­dria Oca­sio­Cortez (D-N.Y.) to raise the top mar­ginal in­come tax rate to 70% on high in­comes, com­puter ty­coon Michael Dell dis­missed it out of hand .

“Name a coun­try where that’s worked. Ever,” Dell said. To which Erik Bryn­jolf­s­son of MIT, a mem­ber of Dell’s speak­ing panel, promptly replied: “The United States.” Bryn­jolf­s­son schooled Dell by in­form­ing him that from the 1940s through the 1960s the top rate on in­come ran as high as 94%. “Those were ac­tu­ally pretty good years for growth,” he said.

Dell also said he con­trib­utes to so­ci­ety via a fam­ily foun­da­tion, adding: “I feel much more com­fort­able with our abil­ity as a pri­vate foun­da­tion to al­lo­cate those funds than I do giv­ing them to the govern­ment.”

It’s proper to ob­serve that Dell’s multi­bil­lion­dol­lar for­tune is based on mail and on­line or­ders of com­put­ers — in other words, on in­fras­truc­ture cre­ated and funded by the govern­ment he dis­dains.

The ques­tion boils down to whether you want so­ci­ety funded out of the whims of Michael Dell or the de­bated judg­ments of your elected rep­re­sen­ta­tives. Thomas Jef­fer­son would vote for the lat­ter, and the ex­tinc­tion of in­her­ited wealth by tax­a­tion if nec­es­sary. Anti-tax cru­saders who never tire of dra­goon­ing the Found­ing Fa­thers into their ar­gu­ments should take that one to heart.

J. Scott Applewhite As­so­ci­ated Press

SEN. EL­IZ­A­BETH WAR­REN, shown with Sen. Charles E. Schumer in 2017, has pro­posed a levy on tax­pay­ers with a net worth above $50 mil­lion. To­day, the top 0.1% con­trol al­most as much wealth as the bot­tom 90%.

Rob Kim Getty Im­ages

R E P. Alexan­dria Oca­sio-Cortez (D-N.Y.) wants to raise the top mar­ginal in­come tax rate to 70% on high in­comes.


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