Con or Constitutional: an Analysis of the "net Worth" Wealth Tax

• Publication year: 2022

54 Creighton L. Rev. 87. CON OR CONSTITUTIONAL: AN ANALYSIS OF THE "NET WORTH" WEALTH TAX

CON OR CONSTITUTIONAL: AN ANALYSIS OF THE "NET WORTH" WEALTH TAX

Brian Fletcher

ABSTRACT

This Article is an in-depth analysis of the wealth tax proposals presented by former presidential candidates Bernie Sanders and Elizabeth Warren to determine if their proposals could be considered constitutional. As both plans propose a wealth tax based on "net worth," this Article attempts to determine how a court or the tax code would most likely define this essential term for tax purposes. The proposals are then compared, in the context of United States legal history, to historically constitutional and unconstitutional federal taxes. Although the tax code is free to define any term as it sees fit, a court would most likely find that a "net worth" wealth tax is more comparable to a "property tax," i.e., a direct tax, and is, therefore, unconstitutional as proposed by the former presidential candidates.

I. INTRODUCTION ................................... 87

II. THE PROPOSALS .................................. 88

III. WHAT IS A WEALTH TAX? ........................ 90

IV. CONSTITUTIONAL COMPLIANCE ................. 92

V. THE CONSTITUTIONAL TAX ...................... 93

VI. THE UNCONSTITUTIONAL DIRECT TAX ......... 94

VII. THE CONSTITUTIONAL INDIRECT TAXES ....... 97

A. EXCISE TAX ...................................... 97

1. The Tax on Use .............................. 97

2. The Corporate Privilege ...................... 99

3. The Wealth Tax Is Not an Excise............. 100

B. INCOME TAX ..................................... 101

C. DUTY OR IMPOST ................................. 103

VIII. CONCLUSION ..................................... 105

I. INTRODUCTION

During the 2020 election season, there were quite a few proposals on how to narrow the gap between the ultra-rich and middle- to lower-class citizens. One such proposal focuses not on changing the tax to income, but on taxing wealth. The "Ultra-Millionaire Tax" proposed by former Democratic presidential candidate Senator Elizabeth Warren is one such plan where she proposes to tax "the wealth of the richest Americans." ^[1] Former Democratic presidential candidate Senator Bernie Sanders has a similar plan for taxing "extreme wealth," which he has creatively named his "Tax on Extreme Wealth" proposal. ^[2] The idea of taxing wealth has become a popular one, but would a tax on wealth based on a household's or person's net worth pass constitutional requirements? Perhaps. The constitutionality of a wealth tax would depend on how a court construes the term "net worth." But in general, a wealth tax would probably not be constitutional.

II. THE PROPOSALS

The "Ultra-Millionaire Tax," proposed by former Democratic presidential candidate Elizabeth Warren, is one of the more popular wealth tax proposals. On her website she urges a tax on "the wealth of the richest Americans." ^[3] The website indicates this would apply "only to households with a net worth of $50 million or more-roughly the wealthiest 75,000 households, or the top 0.1%." ^[4] Under Warren's plan, these "[h]ouseholds would pay an annual 2% tax on every dollar of net worth above $50 million and a 6% tax on every dollar of net worth above $1 billion." ^[5]

Former Democratic presidential candidate Bernie Sanders's plan for taxing "extreme wealth" is similar. His plan, titled the "Tax on Extreme Wealth," proposes:

a 1% tax on net worth above $32 million for a married couple. That means a married couple with $32.5 million would pay a wealth tax of just $5,000. The tax rate would increase to 2 percent on net worth from $50 to $250 million, 3 percent from $250 to $500 million, 4 percent from $500 million to $1 billion, 5 percent from $1 to $2.5 billion, 6 percent from $2.5 to $5 billion, 7 percent from $5 to $10 billion, and 8 percent on wealth over $10 billion. These brackets are halved for singles. ^[6]

Obviously, both former presidential candidates believe a wealth tax would be constitutional. On Senator Warren's website, she states that "[l]egal experts have submitted two separate letters in support of the constitutionality of this proposal." ^[7] However, it does not seem that these letters have been published as no trace of them could be found. Senator Sanders, on the other hand, has released an analysis of why he thinks a wealth tax would be constitutional. Senator Sand-ers states:

Since 1916, we have taxed the inherited wealth of the richest people in this country through the estate tax. For more than 100 years, we have taxed investment income from capital gains and dividends. In order to reduce extreme inequality, we must also establish a tax on the net worth on the top 0.1 percent.

. . . .

". . . [Article I, Section 9, Clause 4 of the Constitution] was part of a compromise with the slave-holding South, and its intention was to prevent the North from imposing a "head tax" on slaves because this could not be apportioned equally among the population of all the states.

"Given its origins, this provision has consistently been construed very narrowly by the Supreme Court, which has found only head taxes and real estate levies to be within its scope[.] Given this history, it is extremely unlikely that the justices will cite the founders' original compromise with slavery to bar a tax that would serve the cause of economic equality and democratic legitimacy. The Roberts court may be conservative, but it is not quite as reactionary as all that." ^[8]

Senator Sanders is correct in some aspects. An estate tax and an income tax have both been upheld as constitutional taxes. ^[9] He is also correct that real estate taxes have been construed as direct taxes. ^[10] However, his analysis is only partially correct.

A "head tax"-also known as a capitation, "per capita tax, or polltax[-]is '[a] fixed tax levied on each person within a jurisdiction,' regardless of income or worth." ^[11] Historically it did have ties to slavery. ^[12] But, as will be explained further, a wealth tax is not a head tax and therefore has no historical ties to slavery. A wealth tax is more similar to a property tax which "[the Founders] thought . . . dangerous, and . . . wanted to constrain Congress's power to use such taxes in ordinary circumstances." ^[13] Also further discussed, estate taxes and income taxes are not wealth taxes. The term direct tax has been construed narrowly, as stated by Senator Sanders, but a direct tax encompasses more than simply head taxes and real estate taxes.

III. WHAT IS A WEALTH TAX?

As already stated, the two most popular wealth tax proposals come from former presidential candidates Bernie Sanders and Elizabeth Warren. Both of these plans evaluate a person's or household's net worth and gauge it against a certain threshold. If the net worth is above that threshold, it is taxed at a certain set percentage. ^[14] A wealth tax, as has been proposed, is a taxation of net worth. Therefore, the characterization of a wealth tax as constitutional or unconstitutional hangs on the definition or interpretation of this essential term. Unfortunately, neither candidate has come forth with a definition for "net worth," nor does the tax code provide a definition for this term. There are, however, definitions from other sources that could be applied to a tax on net worth.

When determining the amount of a wealth tax, the most probable definition of "net worth" probably uses assets and liabilities. The United States Supreme Court defined net worth in a tax case involving the Division of Tax Appeals. ^[15] In New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, ^[16] the Court had to use the plaintiff's net worth to determine a state tax levied on the plaintiff's personal property. Here the Court explained that net worth is found by "subtracting liabilities from the value of assets." ^[17] The Court seems to imply that the value of the assets used was the fair market value of the assets. However, this is not always the case.

The "net worth method" from tax law is a principle applied by the courts that uses a taxpayer's net worth to find his actual income. ^[18] This is only used when a taxpayer has been accused of tax evasion to find discrepancies in his tax return. ^[19] When applying the net worth method, a court will look at a taxpayer's net worth at the beginning of the taxable year and again at the end of the taxable year to determine if his wealth increased more than was reported on his tax return. ^[20] In the net worth method, net worth is defined as the cost paid for all the assets minus the individual's liabilities. ^[21] This is because "the net worth method is a means of reconstructing income, [therefore] assets are generally listed at their cost rather than at their current market value." ^[22]

For purposes of this analysis, whether the first method, using the fair market value, or the second method, using the purchase price of the asset, is used to find a person's net worth, is not all that important. The generally accepted definition of net worth in law and accounting is the value of the assets, however that value is determined, minus liabilities. ^[23] Additionally, even though the presidential candidates themselves have not explicitly stated that net worth is found by subtracting liabilities from assets, many of their proponents do define net worth this way. ^[24] Why does this matter? Because...