Sen. Elizabeth Warren (D-Mass.), a newly declared presidential candidate, has turbocharged the progressive attack on income inequality with a proposal for a “wealth tax” aimed at Americans with net worth of more than $50 million.
Warren herself hasn’t issued many details of her plan. But according to UC Berkeley economists Emmanuel Saez and Gabriel Zucman, who advised her on the proposal, the tax would be 2% on net worth above $50 million and another 1% on net worth above $1 billion. They say it would affect about 75,000 U.S. households, or less than 0.1% of the total, and raise $2.75 trillion over 10 years. That’s about 1% of gross domestic product per year.
Warren’s announcement, made Thursday via Twitter, is certain to be met with two big questions: Is a wealth tax constitutional, and is it necessary? Legal scholars say the answer to the first is yes, and economists (and the evidence of your own eyes) say the answer to the second also is yes.
Whenever there is ... unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right.
Let’s take the questions in turn.
The notion that a wealth tax is unconstitutional derives from a provision of the Constitution prohibiting “direct” taxation unless it’s “apportioned among the states.” That’s generally taken to mean that the amount raised from each state must be proportionate to its population.
That means a direct tax can raise the same amount from Connecticut as from Mississippi because they have roughly the same population (3 million), even though the first is the richest state in the union (with per capita income of more than $36,000) and the second is the poorest ($20,000).
We need structural change. That’s why I’m proposing something brand new – an annual tax on the wealth of the richest Americans. I’m calling it the “Ultra-Millionaire Tax" & it applies to that tippy top 0.1% – those with a net worth of over $50M.— Elizabeth Warren (@ewarren) January 24, 2019
But two legal scholars say this constitutional interpretation is wrong. They’re Dawn Johnsen of Indiana University and Walter Dellinger, a former U.S. solicitor general, of Duke University. Their analysis appeared last year, and is regarded as the leading work on the issue, though their position isn’t unanimously held. (Thanks to Bruce Bartlett for bringing it to my attention.)
Johnsen and Dellinger dismiss the constitutionality issue as “conventional wisdom” that is casually repeated but is the product of “faulty constitutional understanding.” It’s partially the result of a Supreme Court ruling in 1895 known as Pollock that was narrowly — and they say wrongly — decided, and that has been undermined by a string of subsequent Supreme Court decisions.
It’s also generally disdained by legal authorities. Among them is Bruce Ackerman of Yale Law School, who wrote in 1999 that before Pollock, the court used a very narrow definition of “direct tax,” and has returned to that narrow view since. As a unanimous court declared in 1983, he noted, “Congress’ power to tax is virtually without limitation.”
In any event, the court rejected Pollock only a few years later, by upholding an estate tax and a gift tax — that is, a tax on net worth. After the 16th Amendment, which declared an income tax constitutional, was ratified in 1913 as a response to Pollock, discussions of the constitutionality of taxes other than the head tax dropped off the Supreme Court docket.
Still, since debate over the constitutionality of a wealth tax might gum up the process of enacting one, it might make sense to avoid the issue by strengthening taxes that already have passed the court’s muster. That’s the argument of Miranda Perry Fleischer of the University of San Diego.
Under current law, if a taxpayer bought, say, a stock at $100 and leaves it to heirs when it’s worth $1,000, that $900 gain never will be taxed. Fleischer proposes to levy the tax when the taxpayer dies. Since the Supreme Court hasn’t objected to estate taxes, problem solved.
That brings us to the question of whether a wealth tax is needed. The answer here is unmistakably yes. The concentration of wealth in America has reached levels that make the gilt of the 19th century Gilded Age look like dross. There’s sound economic and social sense in taxing the hell out of excessive incomes and excessive wealth.
As Saez and Zucman observe, the top 0.1% today control almost as much wealth as the bottom 90%. Wealth disparity on this scale has a distinctly corrosive effect on society and democracy. As political economist Benjamin Friedman wrote in 2009, its “grave moral consequences” include “racial and religious discrimination, antipathy toward immigrants, [and] lack of generosity toward the poor” — all features of our current political landscape.
That’s not even to mention the economic consequences of placing so much wealth in the hands of people who can’t use it productively, while the majority of Americans struggle to make ends meet on working-class wages.
The Founding Fathers were unnerved by this very phenomenon. Thomas Jefferson wrote to James Madison in 1785, “whenever there is in any country, uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right.”
In his autobiography, Jefferson wrote of the bills he had advocated or passed to form “a system by which every fibre would be eradicated of antient or future aristocracy; and a foundation laid for a government truly republican.” His goal was to “prevent the accumulation and perpetuation of wealth in select families.”
Perhaps fortunately, we don’t have to go far to see and hear these consequences spelled out. The Trump administration has done much of the work for us, especially in its response to the pain it’s imposed on government workers deprived of paychecks by the government shutdown. These are people who are never shy about nominating someone else for martyrdom.
Start with Commerce Secretary Wilbur Ross, whose fortune is estimated at $700 million. In an interview Thursday he advised furloughed workers to take out short-term loans. “People might have to pay a little bit of interest,” he said, “but the idea that it’s a paycheck or zero is not a really valid idea.” He said credit unions were stepping up with low-interest loans. What he didn’t say was that the credit union at his agency, the Commerce Department, was charging workers 8.99% interest per year on emergency loans of up to $5,000.
Larry Kudlow, Trump’s chief economist, told reporters that government employees working without pay during the shutdown were “volunteering” out of “their love for the country and the office of the presidency and presumably their allegiance to President Trump.” And Lara Trump, the president’s daughter-in-law, commiserated with unpaid workers by counseling that “it is a little bit of pain, but it’s going to be for the future of our country.”
The super-rich haven’t been shy about speaking up for their prerogatives. Asked at the Davos economic conference this week about the suggestion by Rep. Alexandria Ocasio-Cortez (D-N.Y.) to raise the top marginal income tax rate to 70% on high incomes, computer tycoon Michael Dell dismissed it out of hand.
“Name a country where that’s worked. Ever,” Dell said. To which Erik Brynjolfsson of MIT, a member of Dell’s speaking panel, promptly replied: “The United States.” Brynjolfsson schooled Dell by informing him that from the 1940s through the 1960s the top rate on income ran as high as 94%. “Those were actually pretty good years for growth,” he said.
Dell also said he contributes to society via a family foundation, adding: “I feel much more comfortable with our ability as a private foundation to allocate those funds than I do giving them to the government.”
It’s proper to observe that Dell’s multibillion-dollar fortune is based on mail and online orders of computers — in other words, on infrastructure created and funded by the government he disdains.
The question boils down to whether you want society funded out of the whims of Michael Dell or the debated judgments of your elected representatives. Thomas Jefferson would vote for the latter, and the extinction of inherited wealth by taxation if necessary. Anti-tax crusaders who never tire of dragooning the Founding Fathers into their arguments should take that one to heart.