Wealth Taxes Under the Constitution: An Originalist Analysis

Abstract

A federal wealth tax is high on the wish list of progressives, but is it constitutional? This Article shows that under the original public meaning of the Constitution, a wealth tax is a “direct tax” that must be apportioned. This means that the percentage of revenue collected in each state must match its percentage of the population. For instance, if two states both have three percent of the population, each must provide three percent of the revenue. This leads to an unappealing outcome: if one state is less wealthy, it needs a higher tax rate to supply its share.

Article I requires apportionment only for a “direct Tax,” and not for “duties, imposts, and excises.” This Article emphasizes a pattern in taxes that do not have to be apportioned: they are levied on transactions, since imposts apply to imports and excises apply to domestic transactions. These taxes were exempted because they are hard to apportion. As a result, the Framers considered a tax “direct” when it applies to taxpayers themselves, not to their transactions. Under this definition, wealth taxes are direct, since they are imposed without a transaction.

We reject the narrower interpretation, espoused by many judges and commentators over the years, that the only “direct” taxes are head and real estate taxes. At ratifying conventions, John Marshall and other Framers offered a broader definition that included taxes on personal property. Their view reflects the practice of states at the time, which taxed these assets.

To rescue wealth taxes from apportionment, many distinguished commentators have offered a range of theories. For example, some treat apportionment as a mistake, while others dismiss it as mainly a protection for the shameful institution of slavery.

But these commentators do not give the Framers enough credit. The taxing power was too important for them to be sloppy or to focus only on the institution of slavery. The Framers wanted to solve the fundamental problem under the Articles of Confederation (insufficient revenue), without recreating the fundamental problem under imperial rule (taxation without representation). Specifically, they sought to discourage what we call “fiscal raids,” in which states join forces to enact national taxes that mostly burden other states. As Professors Ackerman and Amar have shown, this risk could arise with an unapportioned tax on enslaved persons, since it would have been collected mainly in the South. But we show that the same was true of other region-specific practices, such as tobacco plantations and undeveloped land in the South, as well as ships, timber, farms, and manufacturing in the North. Apportionment protected all these region-specific assets. In short, apportionment was fundamental to the Framers’ vision of federalism.

Our interpretation is in some tension with the early case of Hylton v. United States, which upheld an unapportioned carriage tax. The holding arguably is inconsistent with our reading, although there is a plausible way to reconcile it. In dicta, the Justices said that the only direct taxes were head and real estate taxes, but they hedged this view in various ways.

 Yet the holdings of subsequent cases align with our view, with one exception: Pollock v. Farmers' Loan & Trust Co. We agree with Pollock that there are direct taxes other than head and real estate taxes–a correction of the overly narrow dicta in Hylton. But we do not agree that an income tax is direct as long as it is a tax on transactions, such as wages, rent, and dividends.

Keywords: Wealth Tax, Tax Law, Economic Inequality, Direct Tax Clause, Supreme Court, Constitutional Law, Judicial Review, Federalism, Tax Policy