A CONSTITUTIONAL WEALTH TAX.

• Author: Glogower, Ari

TABLE OF CONTENTS INTRODUCTION I. THE CONSTITUTIONAL TAXING POWER A. The Constitutional Provisions B. Interpretative Questions 1. Direct Taxes and the Scope of Apportionment 2. The Subject of Tax 3. Substance and Form 4. The Uniformity Requirement II. THE INCOME TAX OR A TRADITIONAL WEALTH TAX A. The Income Tax 1. Described 2. Constitutional Limits B. A Traditional Wealth Tax 1. Described 2. But Is It Constitutional? III. WEALTH INTEGRATION A. The Methods Described 1. The Base Method 2. The Rate Method 3. The Credit Method B. Evaluation and Design Choices 1. The Ceiling 2. Policy Considerations C. Intersection with Other Reforms 1. Increasing the Top Income Tax Rate 2. A More Accurate Income Tax Base IV. CONSTITUTIONALITY REVISITED A. Wealth Integration Methods 1. The Supreme Court Precedent 2. A Reversal: Preferences for the Less Wealthy 3. Applications in the Current Income Tax 4. The Convergence of Uniformity and Apportionment 5. A Line-Drawing Challenge B. Implications for the Constitutionality of a Traditional Wealth Tax CONCLUSION INTRODUCTION

Policymakers and scholars are giving serious consideration to a federal wealth tax. (1) Wealth taxation could address the harmful effects of economic inequality on our politics and our society, (2) promote equality of social and economic opportunity, (3) and raise the revenue needed to service the national debt and fund critical government programs. (4) In some accounts, the fate of our democracy hangs in the balance. (5)

The reasons for taxing wealth may not matter, however, if a federal wealth tax is unconstitutional. The Constitution requires that any "direct tax" must be apportioned among the states by population, (6) which would be impossible for any modern progressive tax. (7) Not surprisingly, the prior literature on the constitutionality of a wealth tax generally focuses on one central question: Is a traditional wealth tax (8) a "direct tax" subject to the rule of apportionment? (9) Some argue that the Court should interpret the term "direct tax" and the apportionment requirement narrowly to allow a traditional wealth tax, (10) others disagree, (11) and still others consider the constitutional provisions innately indeterminate. (12)

This Article argues, in contrast, that the possible constitutional restrictions on a traditional wealth tax may not matter. If the Supreme Court were to strike down a traditional wealth tax, Congress could instead tax wealth indirectly by adjusting a taxpayer's income tax liability on account of her wealth, through different methods that this Article collectively terms "Wealth Integration" methods. Scholars have just begun to appreciate the potential for using wealth as a factor in the income tax (13) and the possible constitutional implications of this approach. (14)

Before turning to a constitutional analysis of possible Wealth Integration methods, this Article provides the first general account of these methods in the literature. Under each method, a taxpayer's wealth affects one of the factors determining her income tax liability. Under the "Base Method," a taxpayer's wealth affects the amount of her base of taxable income. (15) Under the "Rate Method," a taxpayer's wealth adjusts the rates on her taxable income. (16) Finally, under the "Credit Method," a taxpayer's wealth affects the availability of credits against her income tax liability. (17)

The Wealth Integration methods are flexible general approaches that could be adjusted to tax wealth at different levels and to varying degrees. This Article describes how Wealth Integration methods are also more versatile policy tools than previously appreciated in the literature, (18) particularly when combined with other possible reforms of the tax system. (19)

Wealth Integration methods have the same general effect of a traditional wealth tax in adjusting tax liabilities on account of a taxpayer's wealth. At the same time, these methods also have basic limitations and would operate differently from a traditional wealth tax. Under Wealth Integration, wealth is not taxed as an additive element in the taxable base. As a result, Wealth Integration methods will generally affect tax liabilities only when the taxpayer has a sufficient base of taxable income for the year. (20) For the same reason, a taxpayer's liability will never increase continuously and linearly with her wealth, unlike under a traditional wealth tax. Rather, these methods would operate as progressive taxes on wealth up to a ceiling, with the location of the ceiling set by Congress based on how the method is applied. (21) At the same time, this general limitation can also mitigate the efficiency costs from taxing wealth (22) and would not inhibit Wealth Integration methods from raising significant revenue and advancing distributional goals. (23)

Despite their economic similarities, the constitutional analyses of Wealth Integration methods and a traditional wealth tax would be intrinsically different. This Article traces an argument for why the Court should uphold Wealth Integration methods that begins with doctrinal analysis and then considers the conceptual challenges with invalidating these methods. Wealth Integrations methods are consistent with the Court's own precedent interpreting the constitutional provisions--including with the Pollock cases that invalidated the 1894 Income Tax (24) and represent the Court's most restrictive view of Congress's taxing power. (25) The Court has consistently upheld Congress's ability to use various factors in determining tax liabilities, even if those same factors cannot be used as independent subjects of tax. That is, for purposes of the constitutional analysis, the Court has always distinguished between the subject or "occasion" of tax and the "basis" of tax, which refers more broadly to the factors Congress may consider when determining the final tax due. (26) Under Wealth Integration, wealth operates as a basis of tax, or one of the factors used to determine the tax due on the base of taxable income, which remains the "subject" of tax. (27)

Even if the Court overruled or narrowed these prior precedents, this Article explains why the Court could only invalidate Wealth Integration methods by also invalidating integral features of the current income tax rules and fundamentally restricting Congress's power to tax income under the Sixteenth Amendment. (28) In fact, the current income tax already uses Wealth Integration methods, although these rules are not explicitly labeled as such, and a ruling striking down Wealth Integration could also jeopardize these features of the current tax system. (29) More conceptually, this Article explains why Wealth Integration methods should not be understood as taxes on wealth at all for purposes of the constitutional analysis, and are indistinguishable from rules that simply advantage taxpayers with less wealth. (30)

The Article then revisits the different fates of the apportionment requirement for direct taxes and the "uniformity requirement" for other taxes-which has been virtually written out of the Constitution (31)--and argues that the same reasons for the desuetude of the uniformity argument explain why the Court should interpret a narrow scope for the apportionment requirement as well. (32)

Finally, this Article considers the broader implications of Wealth Integration methods for the scope of Congress's taxing power. While Wealth Integration methods may be desirable "first best" reforms, the possibility that Congress could tax wealth through Wealth Integration methods also provides a new argument why the Court should uphold a traditional wealth tax. The tax law generally prioritizes substance over form in designing tax rules, since formal distinctions tend to be less effective to the extent taxpayers can respond by shifting from less favorable to more favorable rules. (33) Similarly, if the Court found that the Constitution foreclosed a traditional wealth tax, Congress could respond by reproducing the economic effects of a traditional wealth tax through Wealth Integration methods, but with a more favorable constitutional analysis. In this case, the Court could only invalidate Wealth Integration methods by fundamentally restricting Congress's power to tax income under the Sixteenth Amendment. On the other hand, if the Court upheld Wealth Integration methods but invalidated a traditional wealth tax, this approach would distinguish between economically similar taxes on the basis of their formal label while still allowing Congress to tax wealth and thereby diminishing the effect of the apportionment requirement as a restraint on Congress's taxing power. In this case, the Court should instead interpret the constitutional tax provisions as allowing Congress broad power to tax wealth, regardless of the form.

1. THE CONSTITUTIONAL TAXING POWER

   1. The Constitutional Provisions

      The Constitution gives Congress broad taxing power to raise revenue for public purposes. Article I, Section 8 provides: "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States...." (34)

      This broad federal taxing power replaced the previous (and ineffective) system of requisitions from the states under the prior Articles of Confederation, which allowed Congress to request money from the states but did not empower Congress to enforce these requisitions. (35) The constitutional taxing power remedied this failure and ensured Congress's ability to raise revenue to fund the new federal government. (36)

      The Constitution specifies how Congress must implement different forms of taxes. First, Congress must impose taxes subject to the "uniformity requirement" consistently across the country. Article I, Section 8 provides: "[A]ll Duties, Imposts and Excises shall be uniform throughout the United States...." (37) Congress must also apportion "direct...