I read with interest Professor Ann Babson’s article advocating adoption of Elizabeth Warren’s wealth tax. She points out that during the Eisenhower years, the rich paid at a much higher rate than they do now.
She believes that a wealth tax would result in what she refers to as “ … a more progressive taxation system,” which she deems a desirable result. Ike was president from Jan. 20, 1953 to Jan. 20, 1961. In 1960, the top marginal income tax rate was 91%. However, in that year, the top 1% of taxpayers paid only 13% of total income taxes. In 2016, the last year for which comprehensive comparative figures are available from the IRS, the top 1% of taxpayers paid 37.3% of total income taxes, and they paid at a rate seven times higher than the average rate paid by the bottom 50% of taxpayers. The tax system as it currently stands is certainly far more progressive than in Ike’s presidency.
Warren’s wealth tax may be unconstitutional. Congress gets its power to tax from Article I, Sections 8 and 9 of the Constitution and Amendment XVI to the Constitution. Very generally, Congress cannot impose a direct tax, such as a property tax, that is not apportioned among the states in proportion to the census.
It would appear that a wealth tax is a direct tax, and it certainly would not be apportioned among the states. Accordingly, it is quite possible that it would not pass a constitutional challenge.
Even if we are to assume that a wealth tax would be constitutional, such a tax would be problematic in application and questionable with respect to compliance. For example, vast amounts of wealth in the United States are in our many closely held businesses. Attempting to establish a fair formula for valuing interests in these businesses for wealth tax purposes is impractical if not impossible.
Additionally, as with the adoption of any new tax, sophisticated practitioners would immediately begin to devise programs and practices that would enable their clients to avoid or minimize exposure to such a tax.
If additional federal revenue is Babson’s objective, it should be accomplished within our existing system of income, estate and gift taxes. However, our country has a spending problem, not a revenue problem. This leads me to wonder why many of our liberal friends who are calling for more progressive federal taxation are the very ones whining about their loss of the federal income tax deduction for state and local income taxes. Doesn’t that seem a self-serving and hypocritical?