Susan Walsh / AP / Shutterstock / Susan Walsh / AP / Shutterstock
Senator Elizabeth Warren says it's time to tax wealth.
The Massachusetts Senator tabled a bill on March 1 to tax households in excess of $ 50 million and up to $ 1 billion at a rate of 2% and above that at 3%. She first proposed the idea of a wealth tax during the 2019 Democratic presidential primaries.
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The legislation, which could raise an estimated $ 3 trillion in a decade, aims to reduce inequality by using the revenues of the richest Americans in new federal programs to raise some of the poorest.
There is at least one problem: it can be unconstitutional.
As a tax policy expert, I know firsthand how the American system has exacerbated inequality. Fortunately, there are other ways to tax the rich.
Income and wealth inequality
Inequality concerns have increased over the past few decades.
Americans experienced significant economic growth and widespread prosperity from the end of World War II through the 1970s.
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In the 1980s, President Ronald Reagan cut taxes on the rich dramatically – twice – and lowered the maximum wage rate from 70% to 28%.
Studies have shown that the decline in tax rates, combined with other “trickle-down” policies such as deregulation, has led to ever increasing income and wealth imbalances.
The richest 1% controlled 39% of total wealth in 2016, up from less than 30% in 1989. At the same time, the bottom 90% owned less than a quarter of American wealth, compared with more than a third in 1989.
Currently, the federal government taxes all income above $ 518,400 at 37% and an additional 3.8% investment tax on income above $ 250,000.
The problem with a wealth tax
Warren's wealth tax is set to change that.
Your tax on land valued at over $ 50 million would affect an estimated 100,000 families, or less than 1 in 1,000, according to the University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman. The tax wouldn't start until 2023.
Unlike an income tax, a wealth tax reaches the root of both wealth and income inequality.
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There's just one catch: there are strong arguments that a federal wealth tax is unconstitutional. Property taxes violate Article I, Section 2, Section 3 of the US Constitution, which prohibits the federal government from levying "direct taxes" that are not evenly distributed among states.
A direct tax is a tax on something such as property or income. An indirect tax is a tax on a transaction: for example a sale or a gift.
Income tax is a direct tax and is constitutional due to the 16th Amendment specifically allowing income taxes without apportionment. With real estate, you may find that only states levy real estate taxes. In almost all cases, the federal government cannot tax real estate or other forms of wealth without a transaction.
Warren quotes a small group of law professors who support their claim that a property tax is constitutional pattern. The argument against constitutionality, however, is strong enough that a lawsuit in the Supreme Court is sure to follow any attempt to impose a property tax.
Subject to a victory in a Conservative Supreme Court or a painstaking amendment to the Constitution, the federal government is excluded from wealth taxation.
Two more suggestions
Two more proposals for taxing the rich were released in 2019.
New York MP Alexandria Ocasio-Cortez wanted to create a new tax bracket of 60% to 70% for income from work over $ 10 million. She estimated that over 10 years her plan would capture about 4,000 people and gross $ 720 billion.
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One problem with this idea was that the rich can avoid or lower this tax by choosing when to receive the income. A second is that the rich make most of their money from capital gains, which are taxed at a much lower rate than wages.
Bernie Sanders, Senator from Vermont who has since joined Warren's plan, suggested in 2019 seeking wealth, but targeted cases where it is transferred to someone else – which makes it constitutional. He wanted to lower the threshold at which the estate tax applies from $ 11 million – that's only 1,000 properties a year – to $ 3.5 million, where the threshold was in 2009. It would also impose a new rate of 77% on properties over $ 1 billion. Sanders estimated that his plan would raise $ 315 billion over 10 years.
Although this would yield significantly less than the suggestions of his colleagues, it is far superior, since both address the root of the problem – differences in wealth – and can be implemented immediately. And it wouldn't be a constitutional problem.
A rising tide
I agree with all three lawmakers that the United States should return to economic policies that aim to raise all boats.
Although American prosperity and productivity have risen sharply over the past 40 years, most Americans have not done nearly as well as the richest. In 2020 alone, American billionaires saw their wealth grow by $ 560 billion despite tens of millions of people unemployed or dependent on food donations to get enough to eat.
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The US tax system is at least partially responsible for these loopholes. A capital transfer tax – rather than one that taxes wealth – appears to be the best approach to both passing the legal pattern and helping to resolve the problem.
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This is an updated version of an article that was first published on April 2, 2019.
This article is republished by The Conversation under a Creative Commons license. Read the original article.
About the author
Professor of Law and Sociology, Vanderbilt University
Beverly Moran teaches in federal income tax, including individuals, partnerships, tax-exempt organizations and corporations, as well as law and cinema, Islamic law, and race and law.
In addition to her work on the Internal Revenue Code, Moran's interdisciplinary and multidisciplinary work includes empirical legal studies (“Coitus and Consequences”), international and comparative tax law (“Taxation” in the Oxford Handbook of Legal Studies) and Islamic law (“Islamic law and care for the elderly in Central Asian Edgen System ”), labor law (“ right to religious placement in pension plans ”), law and development (“ local government tax incentives for economic development ”), legal education (“ revisiting the work we know so little about: race, wealth , Privilege and Social Justice ”), Philosophy of Law (“ Capitalism and Taxation: A Quest for Social Justice ”), and Politics (“ United States Trade Policy and Export of United States Culture ”).