<p>The legislation, which <a href="https://www.warren.senate.gov/imo/media/doc/Wealth%20Tax%20Revenue%20Estimates%20by%20Saez%20and%20Zucman%20-%20Feb%2024%2020211.pdf">could raise an estimated $3 trillion</a> over a decade, is meant to reduce inequality by using revenue from the wealthiest Americans to pay for new federal programs to lift up some of the poorest.</p><p>There's at least one problem: It may be unconstitutional.</p><p>As an <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=56687">expert on tax policy</a>, I know firsthand how America's system has exacerbated inequality. Fortunately, there are other ways to tax the rich.</p><h2>Income and wealth inequality</h2><p>Concerns about inequality have increased in recent decades. </p><p>Americans <a href="https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality">enjoyed substantial economic growth</a> and broadly shared prosperity from the end of World War II into the 1970s.</p><p>But in the 1980s, <a href="https://www.brookings.edu/blog/up-front/2017/12/08/what-we-learned-from-reagans-tax-cuts/">President Ronald Reagan dramatically slashed taxes on the wealthy</a> – twice – cutting the top rate on wages from 70% to 28%.</p><p>Studies have shown that the drop in tax rates, combined with other “trickle-down" policies such as deregulation, <a href="https://www.thebalance.com/trickle-down-economics-theory-effect-does-it-work-3305572">led to steadily rising income and wealth inequality</a>. </p><p>The wealthiest 1% <a href="https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality">controlled 39%</a> of all wealth in 2016, up from less than 30% in 1989. At the same time, the bottom 90% held less than a quarter of America's wealth, compared with more than a third in 1989. </p><p><iframe class="tc-infographic-datawrapper" frameborder="0" height="400px" id="XMweK" rel="border: none" src="https://datawrapper.dwcdn.net/XMweK/2/" style="border: none" width="100%"></iframe></p><p>Currently, the federal government <a href="https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/">taxes all income above $518,400</a> at 37% with <a href="https://www.thebalance.com/net-investment-income-tax-3192936">an additional 3.8% investment tax</a> on incomes over $250,000.</p><h2>The problem with a wealth tax</h2><p>Warren's <a href="https://www.congress.gov/bill/117th-congress/senate-bill/510">wealth tax</a> aims to change that. </p><p>Her tax on estates worth over $50 million <a href="https://cdn.theconversation.com/static_files/files/1498/Wealth_Tax_Revenue_Estimates_by_Saez_and_Zucman_-_Feb_24_20211.pdf?1614702906">would affect an estimated 100,000 families</a>, or fewer than 1 in 1,000, according to University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman. The tax wouldn't start until 2023. </p><p>Unlike an income tax, a wealth tax <a href="https://theweek.com/articles/717294/wealth-inequality-even-worse-than-income-inequality">reaches the root</a> of both wealth and income inequality.</p><p>There's only one snag: There are <a href="https://taxfoundation.org/warren-wealth-tax-constitutionality/">strong</a> <a href="http://nymag.com/intelligencer/2019/02/constitutional-concerns-are-a-major-risk-for-a-wealth-tax.html">arguments</a> that a federal wealth tax is <a href="https://theconversation.com/how-slaverys-lingering-stain-on-the-us-constitution-spoils-elizabeth-warrens-wealth-tax-proposal-for-now-110964">unconstitutional</a>. Wealth taxes violate Article I, Section 2, Clause 3, of the U.S. Constitution, which forbids the federal government from laying “direct taxes" that aren't <a href="https://constitutingamerica.org/february-24-2011-%E2%80%93-article-1-section-2-clause-3-of-the-united-states-constitution-%E2%80%93-guest-essayist-w-b-allen-havre-de-grace-md-2/">apportioned equally among the states</a>. </p><p>A direct tax <a href="https://www.salon.com/2019/02/22/how-slaverys-lingering-stain-on-the-us-constitution-spoils-elizabeth-warrens-wealth-tax-proposal_partner/">is a tax on a thing</a>, like property or income. An indirect tax is a tax on a transaction: for example, a sale or a gift. </p><p>The income tax is a direct tax and constitutional <a href="https://www.law.cornell.edu/constitution/amendmentxvi">because of the 16th Amendment</a>, which specifically allows income taxes without apportionment. As for property, you may notice that <a href="https://www.financialsamurai.com/property-taxes-by-state/">only states levy real estate taxes</a>. In almost every case, the federal government cannot tax real estate or any other form of wealth absent a transaction. </p><p>Warren <a href="https://www.bloomberg.com/opinion/articles/2019-01-30/elizabeth-warren-s-wealth-tax-is-probably-constitutional">cites a small group</a> of law professors who back her claim that a wealth tax passes constitutional muster. But the argument against constitutionality is strong enough that a lawsuit before the Supreme Court <a href="https://www.boston.com/news/politics/2019/01/29/elizabeth-warren-wealth-tax-constitution">is sure to follow any attempt to enact a wealth tax</a>. </p><p>Barring a victory before a conservative Supreme Court or <a href="https://www.archives.gov/federal-register/constitution">an arduous amendment to the Constitution</a>, the federal government is shut out of taxing wealth.</p><h2>Two other proposals</h2><p>Two other proposals to tax the rich also emerged in 2019.</p><p>Rep. Alexandria Ocasio-Cortez of New York <a href="https://www.cnn.com/2019/01/04/politics/alexandria-ocasio-cortez-tax-climate-change-plan/index.html?utm_term=image&utm_source=twbusiness&utm_content=2019-01-04T15%3A05%3A06&utm_medium=social">wanted to create</a> a new “60% to 70%" tax bracket for income earned from labor over $10 million. She <a href="https://www.washingtonpost.com/business/2019/01/05/ocasio-cortez-wants-higher-taxes-very-rich-americans-heres-how-much-money-could-that-raise/?utm_term=.462f85a3c9f7">estimated that her plan would catch about 4,000 people</a> and raise $720 billion over 10 years. </p><p>One problem with that idea was that the wealthy <a href="https://www.fool.com/taxes/2018/01/27/4-tax-breaks-for-high-income-households.aspx">can avoid or lower that tax</a> by <a href="https://www.moneytips.com/how-the-mega-rich-avoid-paying-taxes">choosing when they receive the income</a>. A second is that the rich <a href="https://www.forbes.com/sites/omaseddiq/2018/03/10/how-the-worlds-billionaires-got-so-rich/#125b82df124c">earn most of their money from capital gains</a>, which <a href="https://www.bankrate.com/investing/long-term-capital-gains-tax/">are taxed at a much lower rate</a> than wage income. </p><p>Vermont Sen. Bernie Sanders, who has <a href="https://www.cnbc.com/2021/03/01/elizabeth-warren-bernie-sanders-propose-3percent-wealth-tax-on-billionaires.html">since signed on to Warren's plan</a>, <a href="https://www.cnbc.com/2019/01/31/bernie-sanders-proposes-big-estate-tax-hike-including-77percent-rate-for-billionaires.html">in 2019 proposed</a> going after wealth but targeted instances when it's being transferred to someone else – which is what makes it constitutional. He wanted to lower the threshold at which the estate tax applies from $11 million – which <a href="https://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax">touches just 1,000 estates a year</a> – to $3.5 million, where the threshold stood in 2009. He would also levy a new 77% rate on estates over $1 billion. Sanders estimated that his plan <a href="https://www.washingtonpost.com/us-policy/2019/01/31/bernie-sanders-propose-dramatic-expansion-estate-tax-richest-americans-including-percent-rate-billionaires/?utm_term=.9c31e5590447">would raise $315 billion</a> over 10 years. </p><p>Although this would bring in significantly less than his colleagues' proposals, it is far superior because it both addresses the root of the problem – wealth disparities – and can be implemented immediately. And it wouldn't pose a constitutional problem.</p><h2>A rising tide</h2><p>I agree with all three lawmakers that the United States should return to economic policies that <a href="https://www.economist.com/free-exchange/2014/03/04/does-raising-all-boats-lift-the-tide">seek to lift all boats</a>.</p><p>Although American wealth and productivity has surged in the last 40 years, most Americans <a href="https://www.latimes.com/business/lazarus/la-fi-lazarus-economy-stagnant-wages-20180831-story.html">have not fared nearly as well</a> as the <a href="https://inequality.org/facts/wealth-inequality/">richest have</a>. In 2020 alone, <a href="https://www.forbes.com/sites/chasewithorn/2020/12/16/the-worlds-billionaires-have-gotten-19-trillion-richer-in-2020/?sh=52eb3f857386">America's billionaires saw their wealth increase $560 billion</a>, even as tens of millions <a href="https://www.bls.gov/news.release/empsit.nr0.htm">were unemployed</a> or <a href="https://philanthropynewsdigest.org/news/one-in-seven-americans-rely-on-foodbanks-report-finds">depended on food donations</a> to get enough to eat. </p><p>The U.S. tax system is at least partly responsible for these gaps. A wealth transfer tax – rather than one that taxes wealth – seems to be the best approach to both pass legal muster and help solve the problem.</p><p><em>This is an updated version of an <a href="https://theconversation.com/so-you-want-to-tax-the-rich-heres-which-candidates-plan-makes-the-most-sense-111945">article first published</a> on April 2, 2019.</em><img alt="The Conversation" height="1" src="https://counter.theconversation.com/content/156349/count.gif?distributor=republish-lightbox-basic" width="1"/></p><p><br/></p><p><em>By <a href="https://theconversation.com/profiles/beverly-moran-681132">Beverly Moran</a>, Professor of Law and Sociology, <a href="https://theconversation.com/institutions/vanderbilt-university-1293">Vanderbilt University</a></em></p><p><em>This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/elizabeth-warrens-wealth-tax-would-reduce-inequality-the-problem-is-its-probably-unconstitutional-156349">original article</a>.</em></p>
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