Both Sen. Elizabeth Warren and Sen. Bernie Sanders have proposed a wealth tax as a way to reduce financial inequality in this country.
It seems crazy, but the top 1% of U.S. households have more wealth than the bottom 90%. A wealth tax would raise lots of money — experts have suggested $2.75 trillion over 10 years. This money would help pay for some of their other proposals, like Medicare for all and student loan forgiveness.
The wealth tax would work like the real estate tax that every property owner pays now, except it would be paid to the federal government rather than to your county government. Your property tax is based on the value of your home or other real estate and is paid every year in two installments. The more valuable your property, the more taxes you pay.
Elizabeth Warren's proposal would apply this to all property that people own — stocks, bonds, real estate, businesses, private planes, jewelry. However, the tax would only be paid by those whose wealth is above $50 million, and at a 2% rate. If you’re worth over $1 billion, the rate is 3%. Under Sanders’s plan the rate would reach 10% on wealth over $10 billion.
Twelve countries in Europe have tried the wealth tax, but today only Norway, Switzerland and Spain still have it. There are several reasons it didn’t work well in Europe. People could avoid the tax by moving to another country, since European Union members don’t tax their nationals living elsewhere. For example, Sweden’s richest man, Ikea founder Ingvar Kamprad, left that country to escape its wealth tax, and in France 10,000 people with $35 billion euros moved away.
In the U.S., you can’t avoid taxes by moving, since we are responsible to the IRS no matter where we live. The only way to escape the IRS is to renounce citizenship, an extreme move that in both Warren’s and Sanders’s plans would trigger a large exit tax of 40% on net worth.
Tax evasion is also a bigger problem in Europe than here. The EU did not require banks in Switzerland to share information, and many people had offshore accounts. The U.S. dealt with that in 2010 when President Barack Obama signed into law the Foreign Account Tax Compliance Act, which compels foreign financial institutions to send detailed information to the IRS.
Also, the European wealth tax plans had many exceptions, like paintings, small businesses, and homes. They started taxing people worth $1 million, meaning they hit about 2% of the population, compared with about 0.1% of the population for the proposed U.S. plans.
The big problem with a wealth tax, as I see it, is that it may be unconstitutional. The U.S. Constitution says that Congress can impose a "direct" tax only if it is apportioned among the states according to each state's population. Clearly a wealth tax is a “direct” tax on property. In 1895, the Supreme Court ruled in the Pollock case that even the income tax was unconstitutional if it taxes income from property (like rent, interest and dividends). That’s why we had to adopt the 16th Amendment to the Constitution in 1913; it states “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
The Pollock case was decided by a 5-4 vote. One of the dissenters wrote that this decision “involves nothing less than the surrender of the taxing power to the moneyed class. By resuscitating an argument that . . . has lain practically dormant for a hundred years, it is made to do duty in nullifying, not this law alone, but every similar law that is not based upon an impossible theory of apportionment. Even the spectre of socialism is conjured up to frighten Congress from laying taxes upon the people in proportion to their ability to pay them.”
It may be necessary to amend the Constitution again if we are going to create a wealth tax in this country.
James H. Manahan is a Harvard Law School graduate and was named one of Minnesota’s Top Ten Attorneys. He now handles family law, wills and probate in the Lake County area, and does mediation everywhere. He writes a regular column on legal issues for the News-Chronicle. He can be reached at firstname.lastname@example.org or jamesmanahan.com.