A Constitutional Wealth Tax

Policymakers and scholars are giving serious consideration to a federal wealth tax. Wealth taxation could address the harms from rising economic inequality, promote equality of social and economic opportunity, and raise the revenue needed to fund critical government programs. These reasons for taxing wealth may not matter, however, if a federal wealth tax is unconstitutional. Scholars debate whether a tax on a wealth base (a “traditional wealth tax”) would be a “direct tax” subject to apportionment among the states by population. This Article argues, in contrast, that this possible constitutional restriction on a traditional wealth tax may not matter. If the Court struck down a traditional wealth tax, Congress could instead tax wealth by adjusting a taxpayer’s income tax liability on account of her wealth. This Article describes three general methods for making this adjustment (collectively, “Wealth Integration” methods). A taxpayer’s wealth could affect her taxable income base (the “Base Method”), the applicable rate schedule (the “Rate Method”), or the availability of credits against tax (the “Credit Method”). Wealth Integration methods could replicate the economic effects of a traditional wealth tax but with an intrinsically different constitutional analysis. The Court could strike down Wealth Integration methods only by overruling settled prior precedent, invalidating many current features of the income tax, and fundamentally restricting Congress’s power to tax income under the Sixteenth Amendment. Finally, the possibility that Congress could instead tax wealth through Wealth Integration methods provides a new argument why the Court should uphold a traditional wealth tax. Otherwise, the Court would have to choose between fundamentally restricting the Sixteenth Amendment—and jeopardizing the income tax as we know it—or distinguishing between economically similar taxes on the basis of their formal label while still allowing Congress to tax wealth and diminishing the effect of the apportionment requirement as a restraint on Congress’s taxing power

A Basic Needs Baseline for Distributional Analysis

Studies of income inequality and the distributive effects of taxes and government spending drive debates over progressive fiscal reform and economic justice. These distributional studies provide vital information on inequality in market outcomes and how government policies mitigate these disparities. Despite its critical importance, however, distributional analysis encounters inevitable and familiar limitations. These studies face practical challenges in measuring income and the distributional impacts of government policies. Distributional analysis also faces inherent complications in seeking to distinguish between the effects of the market and the government. Even if distributional analysis could precisely measure income and the effects of government policies, these studies would still embed assumptions as to which measures of inequality matter. For example, the measure of market income used in distributional studies offers one possible measure of inequality. This measure, however, does not compare taxpayers’ disposable income available for discretionary consumption or savings, and therefore does not reflect accurately differences in household spending ability. No methodology can offer an objectively correct way to perform distributive analysis. Because of their limitations, however, current distributional studies can understate inequality of household budgets. They can also overstate the distributive effects of government benefits to lower income individuals and understate benefits at the top of the distribution. This Article introduces a new approach which yields a different assessment of income inequality and the effects of government policies. This method first deducts costs individuals incur for basic needs from the baseline of market income to construct what this Article terms a “basic needs baseline”. The method then assesses the distributive effects of explicit taxes and government spending from this new baseline. In effect, this methodology treats expenses for basic needs as implicit taxes or burdens from government inaction, when the government does not provide for them, rather than as affirmative benefits when the government does provide for them. A basic needs baseline does not offer a “solution” to the measurement challenges and inherent limitations in distributional analysis. It does , however, offers a different — and valuable — measure of economic inequality and the effects of government policies. This method mo re accurately reflects the reality of differences in household budgets and redresses the imbalances in distributional analysis resulting from its unavoidable limitations

How to Measure and Value Wealth for a Federal Wealth Tax Reform

Over the last several decades, wealth inequality has exploded, warping economic outcomes and limiting opportunity—for individuals and for the US at large. Sky-high income inequality and runaway income gains for the nation’s highest earners compound that wealth inequality and are insufficiently taxed under the current tax regime. Further, wealth in the US has always been heavily skewed by race. Since the country’s founding, US laws and customs have prevented Black and brown people from receiving fair wages and accruing assets, thereby creating and perpetuating today’s massive racial wealth gap. While our existing tax systems are ill-equipped to tackle these challenges, a well designed, high-end wealth tax could both help level the playing field and promote shared economic prosperity. The existing US income tax regime is cash realization–based and thus mostly takes a deferral-based approach to valuation of the economic income derived from wealth accumulations—an approach to valuation that can be politically fragile and extremely vulnerable to gaming. To achieve meaningful progressive taxation of the very wealthy, we should instead value and tax income and wealth in real time. Encouragingly, this strikes many as an obvious solution, and governments around the world are now considering wealth tax proposals. In the US, the 2020 presidential campaigns of Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) brought the idea to the national stage. Their proposals to tax the wealth of multimillionaires and billionaires generated broad public support—even among many Republicans—and broadened the conversation over the future of progressive tax reform. Fundamental to the design of a wealth tax is how to measure and value taxpayers’ wealth. This report outlines a practical approach to doing so that can form the basis of federal wealth tax legislation. In general, the proposed wealth tax would value assets at their fair market value, the notional price at which the asset would voluntarily change hands between an informed buyer and seller, both operating at arm’s length. Beyond this general rule, assets and liabilities that are hard to value would be subject to additional rules for measuring fair market value. As this report will explain, although there are many difficulties involved in designing a valuation and measurement system, these difficulties are not inherently more challenging when it comes to designing and implementing a wealth tax than they are for designing and implementing an income tax. For either an income tax or a wealth tax, there is no perfect valuation or measurement system, and trade-offs must be made amongst potentially conflicting goals. Measuring wealth can sometimes be complicated and will require additional funding and capacity for the Internal Revenue Service (IRS) or other additional enforcement mechanisms, along with sometimes complex-seeming rules—but these administrative costs are low compared to the revenue at stake if valuation and enforcement are not taken seriously. Additionally, so long as a wealth tax is designed with a high exclusion threshold, only the wealthiest taxpayers—those with complicated wealth holdings and excellent legal and accounting help— would face any thorny valuation issues or compliance obligations. This report will explain the best approaches for valuing the most important categories of taxpayers’ wealth, both for forms of wealth that are relatively easy to value and for forms of wealth that are more difficult to value

Why a Federal Wealth Tax is Constitutional

The 2020 Democratic presidential primaries brought national attention to a new direction for the tax system: a federal wealth tax for the wealthiest taxpayers. During their campaigns, Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) both introduced proposals to tax the wealth of multimillionaires and billionaires, and to use the revenue for public investments, including in health care and education. These reforms generated broad public support—even among many Republicans—and broadened the conversation over the future of progressive tax reform. A well-designed, high-end wealth tax can level the playing field in an unequal society and promote shared economic prosperity. Critics have argued, however, that a wealth tax would be unconstitutional because of the Constitution’s apportionment rule, which requires certain taxes to be apportioned among the states according to their populations. These critics advance maximalist interpretations of the apportionment rule and reconstruct the rule as a significant limit on Congress’s constitutional taxing power. In response to these objections, this brief explains why these critics misinterpret the role of the apportionment rule, and why the Constitution grants Congress broad taxing powers that allow for a wealth tax, whether it is apportioned or not. The maximalist interpretations misapprehend the role of apportionment in the constitutional structure, and improperly elevate a peripheral rule into a major barrier to tax reform. This brief explains why constitutional history and Supreme Court precedents instead support a measured interpretation of the apportionment rule. This measured interpretation preserves apportionment’s role in the constitutional structure—and does not read the provision out of the Constitution—but also does not improperly inflate the rule into a fundamental limitation to Congress’s taxing power. Under this interpretation, the Constitution allows Congress to enact an unapportioned wealth tax but would still require apportionment for some other forms of taxes, such as a tax on real estate alone. This brief offers a descriptive analysis of the constitutional provisions and consequently describes how any member of the Supreme Court should evaluate a federal wealth tax, regardless of the member’s personal motives or policy preferences. Discussions of the constitutionality of a wealth tax sometimes conflate this descriptive analysis—as to what the Constitution in fact does and should require—with a predictive analysis of how particular members of the current Supreme Court might rule. Although this brief primarily offers a descriptive analysis of the constitutional provisions and what they require, the final section addresses the separate question of whether Congress should enact a wealth tax at a time when particular members of the Supreme Court may rely upon maximalist arguments to strike it down. A federal wealth tax warrants sustained and careful debate on the merits: how it should be designed, how it will affect economic activity and tax revenues, and how it should interact with other taxes. This important debate, however, should not be short-circuited by reflexive arguments that a wealth tax would be unconstitutional. Rather, voters and legislators should determine the scope and design of a federal wealth tax, as the Constitution ultimately requires

Taxation and Law and Political Economy

The Law and Political Economy (LPE) project seeks to reorient legal thought by centering considerations of power, equality, and democracy. This reorientation would supplant approaches to legal thought that prioritize efficiency and neutrality, and that imagine a pre-political market “encased” from legal scrutiny or intervention. This Article seeks to advance dialogue between LPE and tax scholarship. The Article first describes the areas of intersection between the two literatures and then offers general insights each can learn from the other as a basis for further engagement. The Article describes both why taxation is central to LPE and the project’s importance for the future of tax scholarship and policy. Unlike many other areas of law, the tax system explicitly accounts for economic differences and serves an overt distributive function—two considerations that LPE would center in legal thought. Tax scholarship also reflects both the priorities and considerations at the center of LPE and the market-based frames it would supplant, and thereby offers lessons for how LPE might navigate the insights and limitations of current legal thought and reshape its future. At the same time, LPE offers an opportunity to envision new priorities and analytic modes for tax scholarship, and future possibilities for the tax system

The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the 2017 Tax Legislation

The 2017 tax legislation brought sweeping changes to the rules for taxing individuals and business, the deductibility of state and local taxes, and the international tax regime. The complex legislation was drafted and passed through a rushed and secretive process intended to limit public comment on one of the most consequential pieces of domestic policy enacted in recent history. This Article is an effort to supply the analysis and deliberation that should have accompanied the bill’s consideration and passage, and describes key problem areas in the new legislation. Many of the new changes fundamentally undermine the integrity of the tax code and allow well-advised taxpayers to game the new rules through strategic planning. These gaming opportunities are likely to worsen the bill’s distributional and budgetary costs beyond those expected in the official estimates. Other changes will encounter legal roadblocks, while drafting glitches could lead to uncertainty and haphazard increases or decreases in taxes. This Article also describes reform options for policymakers who will inevitably be tasked with enacting further changes to the tax law in order to undo the legislation’s harmful effects on the fiscal system

Brief of Tax Law Professors as \u3ci\u3eAmici Curiae\u3c/i\u3e in Support of Petitioner in \u3ci\u3eLoudoun County, Virginia v. Dulles Duty Free, LLC\u3c/i\u3e

Amici are professors of tax law at universities across the United States. As scholars and teachers, they have considered the doctrinal roots and practical consequences of judicial limits on state and local taxation. Amici join this brief solely on their own behalf and not as representatives of their universities. A full list of amici appears in the Appendix to this brief

Comparing Capital Income and Wealth Taxes

As part of the Pepperdine Law Review Symposium The Impact of the 2017 Tax Act on Income and Wealth Inequality: Lessons for 2020 and Beyond, this Essay compares two reform directions to rebuild the progressive tax system: an improved capital income tax—which would eliminate the benefit from deferring gains until a sale—or a wealth tax. The Essay first introduces the concept of a “rate-equivalent” wealth or capital income tax as a way to assess reform alternatives consistently and to identify the assumptions as to how the reforms would be structured. For any chosen capital income tax (or wealth tax) reform, the rate-equivalent wealth tax (or capital income tax) is the tax yielding the same tax liability for a taxpayer earning a specified investment return rate. The Essay then illustrates how this concept can help illuminate the assumptions behind comparisons of wealth tax and capital income tax reforms in the literature. Some views in the literature suggest that policymakers should favor an improved capital income tax because the two reforms can have comparable economic effects, while a capital income tax is more desirable in other respects. The Essay surveys the literature evaluating three aspects of these reforms—their economic effects, administrability and avoidance opportunities, and constitutionality—and offers additional perspective on how in each area the distinctions between the two reforms are often narrower than they are sometimes assumed to be in the literature. In many cases the analysis of these reforms will also depend on the particular manner in which each reform is structured or the baseline against which the reform is measured. For this reason, policymakers should not reach categorical conclusions that one reform direction is intrinsically more desirable than the other. The Essay concludes by considering one respect in which an improved capital income tax or a wealth tax can unambiguously differ: as different measures for comparing taxpayers in a progressive tax system. This distinction, however, will depend on the normative choice as to how inequality should be measured and mitigated by the tax system. For example, the choice between a capital income tax and a wealth tax could have different consequences, depending upon whether one assumes that the progressive tax system should mitigate differences in utility, income, wealth, or a combination thereof