Wealth Tax--Unworkable and Unconstitutional

The centerpiece of Elizabeth Warren's plan to remake America is a wealth tax that she says would help fund her proposals for free child care, elimination of student debt, the Green New Deal and Medicare for All. Mind you, the $2.75 trillion she estimates it would generate in a decade would fund only a fraction of what her spending proposals would cost.

Warren is proposing a 2% annual wealth tax on households with a net worth of over $50 million. The tax would increase to 3% for households with net worths over $1 billion.

Not to be outdone, Bernie Sanders recently proposed his own wealth tax that is even more extreme. His tax would start taxing wealthy couples at $32 million (singles at $16 million) at 1% annually and would top out with an 8% tax on fortunes over $8 billion. He estimates it would raise more than $4 trillion over 10 years.

Both candidates defend the proposals as a way in which income inequality can be reduced.

Sanders claims that his plan would cut the wealth of billionaires in America by half over 15 years.

I don't doubt it. Start applying a 5% (minimum rate on $1 billion) to 8% tax for 10 years and do the math.

CNBC estimates that Jeff Bezos would have to pay $9 billion a year in wealth taxes under the Sanders plan. It kind of makes you wonder whether Bezos should suggest to The Washington Post (which he owns) that they might want to take it a little easier on Donald Trump.

Of course, the people that will pay the tax can also do math. The odds are that they are pretty good at it considering the financial success they have had. That is why it is likely that they will take actions to insure that the government will never collect the amount of revenue that Warren and Sanders estimate it will.

This is not theory. Sanders and Warren like to point to Europe as a model for policy success. Many European countries have tried wealth taxes. Most have abandoned them. They did not raise the money they thought they would. These taxes resulted in capital leaving the country. These taxes have also proven to be very difficult to administer.

Unworkable

In 1990, 12 European countries had some form of wealth tax. Today there are only three--Norway, Spain and Switzerland.

France instituted a wealth tax in 2000. It eventually led to the exodus of 42,000 millionaires from the country and French President Macron eliminated it last year.

What is ironic is that Warren turned to two French economists to design her proposal. Really?

I can say with some experience, having practiced as both a tax attorney and CPA, that this proposal would be a nightmare to administer and is tailor-made for manipulation and gaming of the system. It would also undoubtedly result in massive unintended consequences. Whenever the rich are targeted the result is that the little guy usually takes the biggest hit.

Net worth is easy to calculate when you are adding up cash and stock and bonds that are publicly traded. However, it is not so easy when you are trying to value real estate, closely-held businesses, yachts and art. The fact is that much of the wealth of the super-rich is held in illiquid assets which are not easily valued. Annual appraisals would be required and those valuations are very subjective. It would be an administrative and bureaucratic nightmare.

A wealth tax would require a massive increase in funding for the Internal Revenue Service. Those subject to the tax would need to hire legions of tax advisors, appraisers and consultants in order to comply with the law. We would undoubtedly quickly find that the tax is as unworkable in the United States as it has been in Europe.

Never mind that all of this wealth would have also already been subject to the income tax. It will ultimately also be subject to the estate tax. The government will literally get these people coming and going.

Unconstitutional

The bigger problem facing a wealth tax in the United States is that it most certainly is unconstitutional with any fair reading of the Constitution.

Sanders and Warren claim that legal scholars see no problem with the constitutionality of a wealth tax.

Let's look at the Constitution and you be the judge.

Congress clearly has the power to tax. This general power is stipulated in Section 8 of the Constitution.

SECTION 8. Clause 1. The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.

However, the Constitution establishes separate rules for direct taxes (taxes that are directly assessed on individuals, e.g. income, property, etc) and indirect taxes (taxes levied on transactions, e.g. tariffs, duties, sales, etc.)

Indirect taxes are allowable but the rate must be uniform across the entire country. For example, a national sales tax would be constitutional as an indirect tax but the same rate would have to apply in every state. You could not have one rate in California and another in Delaware.

Direct taxes must be apportioned among the states based on population  to be in accordance with the Constitution. This means that for a direct tax to be allowable any revenue raised has to be equal on a capitation or head count basis on a state by state basis. This clearly is inimical to income, wealth or property taxes at the national level.

SECTION 2. Clause 3. Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers.

What this means is that you can have direct taxes but they have to raise the same amount of money on a per person basis across the union. For example, California has 40 million people. Let's assume that a 5% wealth tax would bring in $40 billion. That works out to $1,000 per person. Delaware has 1 million people. Due to the fact that there are not as many wealthy people in Delaware a 5% tax only works out to $500 per person. The wealth tax would have to be 10% for Delaware residents in order to bring the per capita levy to $1,000.

The so-called Apportionment Clause above (Section 2. Clause 3) is why the 16th Amendment was required in order to allow the federal government to institute the federal income tax in 1913.

Article XVI. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. 

Notice that the 16th Amendment only provides the power to Congress to avoid the Apportionment Clause in order to lay and collect taxes on income. It says nothing about wealth or property.

You might wonder how the estate tax could be constitutional in that it effectively is a tax on the wealth of the decedent. Isn't that a direct tax? The estate tax is not actually considered to be a tax on the property of the estate, but rather an excise tax on the privilege of transferring property at death. The triggering event is the death of the testator. The current statute imposes a tax on the transfer of a decedent's taxable estate. It is therefore considered an indirect tax not a direct tax.

There is no doubt that the strict limitation on direct taxes was exactly what the Founders intended.

They were very worried about the conflicts and factions that would arise between rich and poor and the unequal division of property in a society.

These are direct quotes from Federalist Papers #10.

The most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. 

Where did they see the most danger of a majority in trampling the rights of a minority? Taxation.

The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets. 

That is why the Constitution has the restrictions it has on direct taxes like the proposed wealth tax of Sanders and Warren. The Founders were not fans of the redistribution of wealth or property. They actually called the equal division of property "wicked and improper."

Was their intent clear enough? In my opinion, it could not be much clearer.

Unjust

Here is how Warren summarizes her Ultra Millionaire tax plan on her campaign website.

"... this small tax on roughly 75,000 households will bring in $2.75 trillion in revenue over a ten-year period."

Small tax? It might be a small percent but it raises an enormous amount of money.

75,000 households compared to 330 million people in the United States?

Talk about trampling on a small minority and the rules of justice.

Would the Supreme Court rule that a wealth tax is constitutional considering the clear language and unambiguous intent of the Founders?

Anything can happen when all you have to do is get five justices on your side.

We have seen it time and time again.

That is why the Supreme Court is so important to Democrats.

The Democrats know that without the Supreme Court "making law" they have little hope in realizing their progressive ideals. They have generally failed in establishing any of their agenda through Constitutional means. Most everything they care about in the last 50 years did not come from legislation or constitutional amendment but by the opinions of five Supreme Court justices. Look no further than abortion and gay marriage as prime examples. Or the affirmation of the constitutionality of Obamacare.

Similarly, Elizabeth Warren and Bernie Sanders are ultimately looking to the Supreme Court to give them a wealth tax.

That is why liberals live and die with each breath that Ruth Bader Ginsburg takes.

Our Founders would simply be aghast with what the Democrats are proposing.

It is tempting to think that 75,000 households are going to pay the freight for the rest of us.

Don't be deceived or deluded.

It is unworkable. It is unconstitutional. It is unjust. It is unAmerican

In fact, it might ultimately result in the undoing of the Unites States of America.

Think about your vote in 2020 very, very carefully.