A Wealth Tax is Constitutional

Abstract

"Direct tax" must be apportioned among the states by population. "Direct tax" was coined in 1783 to describe a proposal to impose requisitions upon the states. Population was the best measure of relative wealth of the states because the states cheated on appraisals of value of real estate.

Before the Constitution, all federal taxes were direct taxes because the Congress could raise revenue only by direct taxes, that is, requisitions upon the states. But over time, various taxes have been expelled from direct tax because it was not reasonable to apportion them, sometimes by Supreme Court decision and sometimes just by operation of ordinary English. Thus import taxes were not direct because goods landed in one state would spread to others and it was not possible to determine what state should get credit in satisfying its quota. Duties and excises were commonly cited as direct taxes until it became clear that uniform rates prohibited apportionment. The Supreme Court in Hylton v. United States with Justices who all had participated in the original debates held that a carriage tax was not direct, although listed on the Treasury's inventory of direct tax, because the rates would have to higher where carriages were rare. The Supreme Court held that taxes on income were not direct because apportionment was not reasonable.

In Pollack v. Farmers' Trust the Supreme Court thought that tax according to population meant that the provision protected taxpayers against an assault on wealth. Pollack is error, a literal reading ignorant of history, because apportionment was trying reach wealth by the best measure available to them, not protect wealth. But Pollack was distinguished to apply only to income tax and then the income tax amendment put the last nail in the coffin.

Taxes on real estate started as direct taxes because it was assumed, to make the political compromises work, that real estate value was equal per capita among the states. Now Mississippi has wealth and real estate that is half of DC, so tax rates would have to be twice as high in Mississippi to satisfy apportionment. The Constitution does not require idiocy. Real estate and wealth taxes can not now be reasonably apportioned, and reasonable apportionment is the defining characteristic of "direct tax."

Note: Published in ABA Tax Times, August 2019. © 2019 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. ISSN 2381-5868.

Keywords: Wealth Tax, Constitutionality

JEL Classification: H24