The Indirect Tax Canon, Apportionment, and Drafting a Constitutional Wealth Tax or Accrual-Income Tax Reform

Abstract

The Constitution requires that “direct taxes” be “apportioned”—that is, that the revenues collected from each State be in proportion to population. Based on this obscure provision, prior scholarship has debated whether unapportioned wealth tax or related accrual-income tax reforms should generally be held constitutional, unconstitutional, or whether specific proposals should be held constitutional and others unconstitutional.

This Article takes a different approach. Recognizing the real uncertainty about how the Supreme Court might ultimately decide, this Article explains how Congress can draft a reform to navigate through that uncertainty. Specifically, this Article explains how Congress can draft a wealth tax or accrual-income tax reform that should survive constitutional scrutiny regardless of how the Supreme Court might ultimately rule on the disputed constitutional questions.

To that end, this Article argues that the long line of cases on direct and indirect taxes, combined with the 16th Amendment, synthesize into what we label as the “Indirect Tax Canon.” This Article further argues that courts following that Canon should uphold properly constructed wealth tax or accrual-income tax reforms structured as indirect taxes—without requiring apportionment.

Yet this Article then additionally explains how Congress can bolster such reform proposals by drafting fallback provisions to easily transform these reforms into apportioned taxes, fairly and practically, in the event of the Court ruling that apportionment is required. Any interstate inequities from this can be remedied through a fiscal equalization program that would rebate excess revenues to poorer states. As a result, with careful drafting, the constitutional risks for a wealth tax or related accrual-income tax reform should be minimal.

(This working paper is an early draft of a research project that has since been further developed and split into two separate articles, the first of which is: Brooks, John R. and Gamage, David, TAXATION AND THE CONSTITUTION, RECONSIDERED (March 18, 2022). Tax Law Review, Forthcoming, Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4061257)

Keywords: Wealth Tax, Accrual-Income Tax, Indirect Tax Canon, 16th Amendment, Apportionment

JEL Classification: K34