Senator Warren’s wealth tax could deter billionaires from paying almost no taxes – but it’s likely not constitutional
A new report showing America’s greatest billionaires paid barely any income taxes from 2014 to 2018 has rekindled the wealth tax debate – like the one proposed by Senator Elizabeth Warren.
ProPublica’s report – which based its findings on a series of tax filings filed by an anonymous source – found investor Warren Buffett paid $ 23.7 million in taxes on $ 125 million in reported income and at the same time amassed $ 24.3 billion more in wealth. Year period. Amazon founder Jeff Bezos saw his fortune soar $ 99 billion from 2014 to 2018, but paid just $ 973 million in taxes on $ 4.22 billion in reported income.
Overall, the 25 richest Americans saw their wealth grow by $ 401 billion over that period as the value of their investments such as stocks and real estate grew. They paid just $ 13.6 billion in income taxes, or 3.4% of their wealth gain. In context, ProPublica found that middle-class Americans in their early 40s made only $ 65,000 in wealth – and paid almost the same amount in taxes – during the reporting period
As a tax policy expert, I know exactly how the American system has exacerbated inequality. However, there is at least one problem with Warren’s wealth tax as a solution: it can be unconstitutional.
Income and wealth inequality
Concerns about inequality have increased over the past few decades.
From the end of World War II through the 1970s, Americans enjoyed considerable economic growth and largely shared prosperity.
But in the 1980s, President Ronald Reagan slashed taxes on the rich – twice – and cut top wages from 70% to 28%.
Studies have shown that lowering tax rates in combination with other “trickle-down” measures such as deregulation led to steadily increasing income and wealth inequality.
The richest 1% controlled 39% of total wealth in 2016, up from less than 30% in 1989. At the same time, the bottom 90% held less than a quarter of America’s wealth, compared to more than a third in 1989.
Currently, the federal government taxes all income above $ 518,400 at 37% for single parents with an additional 3.8% investment tax on income above $ 200,000. Of course, as ProPublica’s tax documents cache shows, loopholes and tax evasion mean that actual income tax rates are significantly lower.
Evelyn Hockstein / Pool via AP
Warren’s property tax
Warren’s proposal on wealth tax aims to change that.
In March 2021, the Massachusetts Democrat tabled a household tax bill worth over $ 50 million and up to $ 1 billion at a rate of 2% and anything beyond that at 3%. She first proposed the idea of a wealth tax during the Democratic primaries in 2019.
The legislation, which could raise an estimated $ 3 trillion in a decade, aims to reduce inequality by using the revenues of the richest Americans to pay for new federal programs to help some of the poorest.
According to economists Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley, an estimated 100,000 families, or less than 1 in 1,000, would be affected by their tax. The tax is not due to be introduced until 2023.
For his part, President Joe Biden has indicated no support for a wealth tax. But he aims to raise the top income tax rate paid by the wealthy from 37% to 39.6%. And he wants to double the capital gains ratio to fund his infrastructure proposal.
The problem with wealth taxation
In contrast to an income tax, a wealth tax affects both the cause of wealth and income inequality.
There’s just one catch: there are strong arguments that a federal property tax is unconstitutional. Property taxes violate Article I, Section 2, Clause 3 of the US Constitution, which prohibits the federal government from levying “direct taxes” that are not shared equally between states.
A direct tax is a tax on something like property or income. An indirect tax is a tax on a transaction, such as a sale or a gift.
Income tax is a direct tax and, due to the 16th amendment, is constitutional that expressly allows income taxes without apportionment. As for real estate, you may find that only states levy real estate taxes. In almost all cases, the federal government cannot tax real estate or other forms of property without a transaction.
Warren quotes a small group of law professors who support their claim that a wealth tax is constitutional. But the argument against constitutionality is strong enough that any attempt to pass a property tax will be followed by a lawsuit in the Supreme Court.
Aside from a victory in a Conservative Supreme Court or a painstaking constitutional amendment, the federal government is excluded from wealth taxation.
Two more suggestions
Two other proposals for taxing the rich have also surfaced in recent years.
New York MP Alexandria Ocasio-Cortez wanted to introduce a new tax bracket of “60% to 70%” for income from work over US $ 10 million.
One problem with this idea was that the rich can avoid or lower this tax by choosing when to receive the income. Second, the rich make most of their living from capital gains, which are taxed much less than wages.
Vermont Senator Bernie Sanders, who has since signed Warren’s plan, suggested in 2019 that we search for the assets but deliberately accept cases where it would be transferred to someone else – which makes it constitutional. He wanted to lower the inheritance tax threshold from $ 11 million – which is only 1,000 estates a year – to $ 3.5 million, where the 2009 threshold was. It would also charge a new rate of 77% for an estate over $ 1 billion.
That would be significantly less profitable than the suggestions of his colleagues, but it is far superior because it both addresses the root of the problem – the wealth differences – and can be implemented immediately. And it wouldn’t be a constitutional problem.
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A rising tide
I agree with all three lawmakers that the United States should return to economic policies that aim to raise all boats.
Although Americans have grown in wealth and productivity over the past 40 years, most Americans haven’t done nearly as well as the richest – and are paying higher tax rates. In 2020 alone, their net worth rose by $ 560 billion, despite tens of millions being unemployed or depending on food donations to get enough to eat.
The US tax system is at least partially responsible for these loopholes. A capital transfer tax – rather than one that taxes wealth – appears to be the best approach to both meeting the legal requirements and helping to resolve the problem.
This is an updated version of an article published on March 2, 2021.