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The Biggest Problem for Warren’s Wealth Tax: The Constitution

December 3, 2019 By Jeremy Jones, CFA

Prof. Elizabeth Warren and Holly Petraeus speak with servicemembers and their families at a forum in Ft. Myer.

The biggest problem wealth taxes proposed by candidates like Elizabeth Warren and Bernie Sanders may face is the constitution itself. Direct taxes like wealth taxes are specifically banned by the constitution. So was the income tax until the 16th amendment allowed it in 1913. Now, progressives are looking for ways to slip a wealth tax by the Supreme Court. Laura Davison and Ben Steverman report for Bloomberg:

Democratic presidential candidates Elizabeth Warren and Bernie Sanders want to enact a wealth tax to pay for their large government programs. The biggest barrier may not be Congress, but the Constitution.

The Constitution says the federal government is prohibited from imposing “direct taxes,” except for income tax, without distributing the money among the states according to population. The progressive candidates’ wealth taxes would be used for federal programs such as free health care, free public-college tuition and universal day care.

Even if Democrats manage to win control of the House, the Senate and the White House, wealth-tax supporters have become increasingly worried that their policy plans could be stymied by a constitutional challenge. This was a concern even before President Donald Trump installed two new members of the Supreme Court.

So left-leaning tax experts are working on ways to put a wealth tax on a more solid constitutional footing. And there is no shortage of ideas.

The trouble comes because few legal scholars agree on what a “direct” tax is, nor how it’s supposed to be divided. There’s evidence that even the original writers of the Constitution didn’t agree on what that meant.

“These terms are deeply ambiguous,” says Ohio State University law professor Ari Glogower.

“It’s a political question on which only nine people get to vote,” says University of California, Berkeley law professor Mark Gergen.

So tax wonks are looking at other countries’ tax systems and wading through decades of now-suddenly-relevant theorizing by academics on the ideal ways to tax capital.

The nation spent much of its first 125 years in a fierce battle over what taxes were allowed. The Supreme Court ruled 5-to-4 that an income tax was an unconstitutional direct tax in 1896, but at other times it declared that taxes, like those on carriages and estates, were OK.

The 16th Amendment, ratified in 1913, settled many of these battles by making clear that income taxes were permissible.

Another amendment is the most surefire way to implement a wealth tax. But that would require two-thirds of the House and Senate voting for it, or two-thirds of the states to sign on, which would be almost impossible politically. The most recent amendment — dealing with congressional pay raises — was ratified in 1992 after initially being raised in 1789.

Read more here.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. CNBC has ranked Richard C. Young & Co., Ltd. as one of the Top 100 Financial Advisors in the nation (2019-2022) Disclosure. Jeremy is also a contributing editor of youngresearch.com.
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