Protect the Nation's Health, Don't Tax Wealth

Ryan Heshmati

April 8, 2022

More and more, there seems to be a sense of resentment between the haves and have nots, as wealth inequality rises. According to the Census Bureau’s Gini Index, wealth inequality data in the United States has risen to its highest point ever collected. While homeowners in places like the Bay Area have seen their multi-million dollar homes increase in value by additional millions, all that many Americans have seen are their rents increasing continuously. The top 1% in America, according to the Federal Reserve, hold 16 times greater wealth than the bottom 50 combined. As a result of this greater and greater sense of injustice in wealth distribution, there have been calls for much stronger taxation of the wealthy. The motivation behind these proposals is to attempt the redistribution of wealth in America.

In an attempt to redistribute wealth held in nontaxable assets (stocks, bonds, or real estate held until death, which is when the cost basis resets), Elizabeth Warren has proposed a wealth tax. The “Ultra-Millionaire Tax” aims to take a 2% tax on all net worth between $50 million and $1 billion, after which it becomes 1%. This move, which would be in addition to the traditional manner of taxing individuals on income, would impact an estimated 75,000 households. Such a move is not only dangerous, but also likely violates American constitutional law.

The 1895 majority decision in Pollock v. Farmers Loan and Trust Company found that direct taxes were unconstitutional. To even institute an income tax, the sixteenth amendment had to be passed in 1913. The strict view of Chief Justice Fuller that, “[…] taxes on personal property […] are […] direct taxes,” and that “[…] being a direct tax, within the meaning of the constitution […] [they are] unconstitutional and void,” leaves policy makers without the power to institute a wealth tax, as that would be considered a tax on personal property. While some scholars point to a carriage tax case as the lifesaver for wealth tax proposals, that decision came a century before Pollock, leaving the 1895 precedent intact.

However, for the sake of argument let us assume that somehow a new amendment is passed and a wealth tax is constitutionally feasible. The idea is none the better, given that it would lead to a mass exodus of capital to the likes of Liechtenstein, the Cayman Islands, and Switzerland. According to NPR’s Greg Rosalsky, the wealth tax the French adopted cost the country 42,000 millionaires over a 12 year period, leading to its repeal by President Macron in 2018. Data is not demanded to understand how a wealth tax can hurt tax revenue. It is simple: wealthy people make decisions in their best interests, known as the rational-choice theory of economics, so they move their money to wherever they can make the most profit. In the United States, the wealthy already have to worry about inflation and investment returns. If, in addition to these concerns, the wealthy have to consider a 2% wealth tax, the incentive to keep and invest money here is lost. With all considerations, a wealth tax is an unconstitutional initiative that will fail to achieve its goal.