Is Sen. Elizabeth Warren’s Proposed Wealth Tax Constitutional?

Sen. Elizabeth Warren (D-MA) has proposed several ambitious, high-cost plans as part of her campaign for the 2020 Democratic presidential nomination ― such as moving toward Medicare for All by expanding Obamacare and forgiving most student loan debt ― but the wealth tax she wants to impose to pay for them may not be constitutional.

Warren’s proposed wealth tax would impose an annual 2% tax on household net worth between $50 million and $1 billion, and a 3% tax on net worth above $1 billion. She argues that it’s “time to fundamentally transform our tax code so that we tax the wealth of the ultra-rich, not just their income.” In the July 2019 Democratic presidential debate, the Massachusetts senator was pressed about the near-certain legal challenge to the constitutionality of her wealth tax. Warren said she was assured by experts it would pass judicial muster.

Why might the wealth tax be unconstitutional?

The Constitution allows the federal government to tax income under the Sixteenth Amendment but prohibits the federal government from imposing direct taxes unless they’re apportioned based on population. While the Constitution’s definition of federal direct taxes in Article 1, Sections 2 & 9 is unclear, the Supreme Court has considered the definition of a “direct tax” in several notable cases as the Tax Foundation observes:

• The Hylton case of 1796 found that a tax on carriages wasn’t a direct tax and that taxes on the possession of goods weren’t prohibited.
• The Pollock case of 1895 found that an income tax was unconstitutional unless apportioned, prompting the ratification of the Sixteenth Amendment in 1913.
• The Knowlton case of 1900 upheld inheritance and estate taxes, finding that they were indirect taxes on the transfer of wealth rather than direct taxes.
• The Flint case of 1911 upheld corporate income taxes, finding that they were excise taxes on the privilege of doing business rather than direct taxes on shares or income.
• The NFIB case of 2012, better known as the Obamacare case, found that the healthcare law’s tax penalty under the individual mandate (which has since been repealed) was constitutional because it wasn’t a direct tax on the ownership of land or personal property.

Warren's proposed wealth tax is different than the above taxes because it applies generally to households with a net worth over $50 million, rather than being incidental to an event (like earning or inheriting income). As a result, it's unclear how the Supreme Court would decide a wealth tax case.

What happens if a wealth tax is implemented?

If a wealth tax were to be upheld as constitutional by the Supreme Court and implemented, it’s not clear that it would bring in the $2.75 trillion in revenue over 10 years Warren projects. Nobel laureate and Yale University economics professor Robert Shiller told the World Economic Forum that:

“There is a problem with the wealth tax. People leave, they take their business elsewhere.”

Capital flight, such as Shiller describes, prompted many of the world’s economically advanced nations that adopted wealth taxes to repeal them. The Organization for Economic Co-operation and Development (OECD), which has 36 member nations with high-income economies, notes that the number of OECD countries with a wealth tax declined from 12 in 1990 to just 4 in 2017 (France, Norway, Spain, and Switzerland).

— Eric Revell

(Photo Credit: iStock.com / utah778)