Is a Wealth Tax Constitutional?

(National Taxpayers Union Foundation) Recent reports indicate that the Biden administration is seriously considering a new and specific wealth tax or mark-to-market tax as a component of the proposed budget reconciliation bill. Since Senator Elizabeth Warren (D-MA) made such a tax proposal a key plank of her presidential campaign platform, the idea has increasingly become part of serious discussions.

Though France canceled its wealth tax in 2018 after facing brain drain, capital flight, and revenue losses, and all but three European nations have repealed theirs after concluding it was a policy failure, the idea remains a priority for the American left.

At various points, elected Democrats have put forward legislative proposals to eliminate the step-up in basis at death that heirs receive when they inherit assets, an annual two or three percent wealth tax, and a one-time wealth tax up to five percent.

But while NTUF has documented the many administrative and economic issues with a wealth tax in the past, perhaps the most important issue to resolve with such a tax is whether it is even constitutional.

Understanding the shaky legal foundation on which a wealth tax stands,Warren commissioned letters back in March from 14 law professors who endorsed its constitutionality. Are they right?

A wealth tax would be an unapportioned direct tax and therefore unconstitutional. The U.S. Constitution allows the Congress to “lay and collect Taxes, Duties, Imposts and Excises” with two explicit conditions relevant here. First, all duties, imposts, and excises “shall be uniform throughout the United States.” Second, “Capitation, or other direct, Tax[es] shall be…in Proportion to the Census.”

S. 510, the Ultra-Millionaire Tax Act of 2021, encompasses Warren’s wealth tax concept. Key provisions of the bill include:

  • Imposes a two percent annual tax on the net worth of households and trusts with more than $50 million in value, with a further three percent rate on households and trusts with more than $1 billion in value.
  • Raises the rate to six percent if universal health care is enacted.
  • Exempts the first $50,000 in household personal property.
  • Instructs the Treasury Department to develop valuation rules, “including formulaic approaches based on proxies for determining presumptive valuations, formulaic approaches based on prospective adjustments from purchase prices or other prior events, or formulaic approaches based on retrospectively adding deferral charges based on eventual sale prices or other specified later events indicative of valuation.”
  • Levies the tax in proportion to the number of days into the year for people who die during the year.
  • Directs the Treasury Department to require information reporting from taxpayers necessary to make valuations and collect the tax.
  • Requires at least 30 percent of taxpayers be audited annually.
  • Increase IRS funding by $100 billion a year.
  • Requires payment of a 40 percent “exit tax” on wealth above $50 million by any American who permanently leaves the United States.

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