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The Proposed Wealth Tax—Is it Constitutional? Equitable? Revenue Generating?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Stephen R. Rolandi
July 16, 2020

In this year’s presidential primaries and debates among the candidates seeking the Democratic Presidential nomination, there was a lot of interest about a proposed wealth tax for very high income American taxpayers. This is not a new idea, and it will surely come up again this year and next.

In this article, I will take a closer look at the proposed wealth tax, how it might work if adopted in the United States, and what its probable effects might be. There are also various constitutional and legal arguments raised in support of, and in opposition to, a proposed wealth tax.

One can define a wealth tax, sometimes referred to as a capital or equity tax, as a government-imposed levy on an entity’s (or person’s) holdings of assets (what an entity or person owns, not earns). This may include such items as cash, bank deposits, real estate, insurance, pension plans, etc. In some instances, liabilities (what a person or entity) owes such as payables, mortgages and other loans are deducted from an individual’s wealth—in which case such a tax is called a net wealth tax. In public finance, we would distinguish this type of tax from levies on personal and corporate income, sales and other types.

Actually, the proposal of a wealth tax is not a new one, and its origins can be traced to antiquity. For example, the city state of Athens imposed a tax of self-assessments (eisphora) on its wealthiest citizens by use of a registry. Not surprisingly, this volunteer system was not very accurate. In the United Kingdom, citizens were assessed taxes on real estate—there was a windows tax imposed in 1696. By 1990, approximately 12 nations in Europe (among them Austria, Germany, Sweden and France) had a wealth tax. Today, only four nations in Europe retain some form of it; Spain, Norway, Switzerland and Belgium.

Most recently, in the United States, wealth tax proposals have been introduced in Congress by U.S. Senators Bernie Sanders (I-VT.); Elizabeth Warren (D-Massachusetts), and others, including Representative Alexandria Ocasio-Cortez (D-NY). Green Party Presidential candidate Jill Stein proposed a wealth tax in 2016, and even Donald Trump as a non-candidate in 1999 proposed a one-time wealth tax.

Senator Warren’s proposal appears to be the most detailed and comprehensive of the wealth tax proposals recently introduced in Congress. Senator Warren introduced her proposal as part of a plan to finance a Medicare for All program.

Her proposal, whose aim is to reduce tax inequality, would levy a new wealth tax on those Americans by creating two new tax brackets—2% for those persons with net assets of $50 million or more; and 6% for those persons with assets greater than $1 billion. Such a plan would likely affect approximately 75,000 Americans (by contrast, Senator Sanders’ proposal is more far reaching—his proposal would require about 180,000 of the wealthiest Americans to pay a wealth tax, which would be done with eight tax brackets).

Here are some of the main features of Senator Warren’s proposals:

  • These wealth tax proposal would likely be phased in, or allow for a deferral period of up to five years.
  • The proposed tax would apply to net assets (sum of assets minus liabilities).
  • A “real corporate profits tax” is also proposed by introducing a 7% corporate tax to every dollar above $100 million that a company reports in annual profits. This tax would exist in conjunction with the current overall corporate tax rate.
  • A proposed increase in Social Security contributions—meaning those individuals earning over $250,000 would pay 14.8%. There would also be a 14.8% contribution requirement on net investment for those individuals earning more than $250,000 and for families earning over $400,000

Senator Warren’s proposals, if enacted, would generate approximately $2.5 to $3.0 trillion dollars in revenue over ten years, which, in the view of some analysts would be sufficient to fund a Medicare for All program and provide some measure of equity among all taxpayers.

However, there might be difficulties in administering a wealth tax. Extremely wealthy individuals tend to have very hard-to-value assets, as they own assets such as real estate holdings, trusts and business ownership interests. It is difficult to value these assets on an on-going basis, and thus difficult to assess an appropriate level of taxation.

According to this view, the tax problems would be compounded as a wealth tax would have to be assessed annually on a much larger number of individuals. High net-worth individuals would be permitted to deduct debt from their asset calculations if they chose to make heavy investments and borrowing. There would also likely be enforcement issues.

Some of the largest criticisms of Senator Warren’s proposals come from those asserting that proposed wealth tax legislation might be unconstitutional, as there has never been a Federal wealth tax. Would a proposed wealth tax be considered a “direct tax” as per Article I, Section 9 of the Constitution? Other legal scholars point to the 16th Amendment to the Constitution, passed in 1913, which gives Congress the power to levy taxes on income; they assert that this is a legal impediment to a wealth tax.   

Would a wealth tax succeed? Much will depend, I believe, on the political make-up of Congress (House and Senate) and the White House next year. Another critical factor would be whether the Supreme Court Justices decide to hear a challenge to any wealth tax law/legislation, and how they might vote on such a legal challenge. As with many things in life, time will tell.

Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He is an adjunct professor of public administration at John Jay College of Criminal Justice (CUNY) and Pace University.. He is President Emeritus of ASPA’s New York Metropolitan Chapter and served several terms on ASPA’s National Council, in addition to board positions with other organizations in New York and Washington, DC. You can reach him at: [email protected] or [email protected].

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