Mar 4, 2021 - Economy & Business

The biggest obstacle to a wealth tax

Illustration of a hand pulling a heavy weight with a "%" sign carved on the side.  

Illustration: Aïda Amer/Axios

Taxing the rich is an idea that's back. An "ultra-millionaire tax" introduced by Elizabeth Warren and other left-wing Democrats this week would raise more than $3 trillion over 10 years, they say, while making the tax system as a whole more fair.

Why it matters: New taxes would be a necessary part of any Democratic plan to redistribute wealth and reduce inequality. But President Biden has more urgent priorities — and Warren's wealth tax in particular faces constitutional obstacles that make it a hard sell.

The big picture: The very richest Americans pay much less tax, as a proportion of their total net worth, than the rest of us.

  • By the numbers: The bottom 99% of Americans pay about 7.2% of their net worth every year in taxes, per Warren. The top 0.1%, by contrast, pay about 3.2%.
  • If that top 0.1% paid an extra 2% wealth tax on top of their existing taxes, that would bring their tax rate up to 5.2% of their net worth, which would still be below average.

Context: Warren's renewed push for a wealth tax — which was also a centerpiece of her presidential campaign — is part of her larger strategy to keep up the pressure on Biden's left flank, and to make sure that inequality doesn't get forgotten about.

  • Even without its wealth tax component, Warren's bill would allot an extra $100 billion to the IRS, to help it audit more rich taxpayers and collect more taxes.

How it works: Warren's tax would exempt the first $50 million of wealth for everybody. After that, individuals and households would have to pay a wealth tax of 2% of their wealth over and above $50 million.

  • Billionaires would face an extra 1% surcharge on wealth over and above $1 billion.
  • The tax would be assessed annually, unlike the one-off 14.25% wealth tax that Donald Trump proposed in 1999.

The catch: Conservative scholars claim that such a tax would be unconstitutional.

  • Article I of the Constitution, Section 9, bars any "capitation, or other direct, tax" — unless such a tax is levied in direct proportion to the number of people who live in each state.
  • The Supreme Court ruled in 1895 that a federal income tax was therefore unconstitutional. The 16th Amendment, ratified in 1913, made income tax constitutional, but many scholars believe it doesn't cover a wealth tax.
  • Even some proponents of a wealth tax, such as French economist Thomas Piketty, worry about its constitutionality. “I realize that this is unconstitutional, but constitutions have been changed throughout history," he said in 2014. "That shouldn’t be the end of the discussion.”

The other side: There is an argument that a wealth tax is constitutional, and that the 1895 case was wrongly decided. It's far from clear, however, that the Roberts court, with its 6-3 conservative majority, would rule that way.

The bottom line: Even if a wealth tax gained the support of the president and both houses of Congress, it would still risk being shot down by SCOTUS after being signed into law.

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