The Supreme Court and the Wealth Tax

March 30, 2021
By William Cooper

As the Biden administration looks for sources of revenue to pay for legislation addressing infrastructure and climate change, a familiar idea has reemerged: the wealth tax. Championed by progressives like Senators Elizabeth Warren and Bernie Sanders, the potential legislation would tax the assets of the wealthiest Americans each year. 

There are valid arguments on both sides of the issue. On the one hand, a wealth tax would narrow the massive inequality gap in the United States. At the same time, however, wealthy individuals often do a better job allocating capital – through business ventures and philanthropy – than the federal government.

One much-repeated argument, however, is a red herring that should be given little weight. Opponents of the wealth tax are fond of proclaiming that it is unconstitutional and therefore the Supreme Court would likely invalidate it. Former Democratic Treasury secretary Robert Rubin, for example, said that a “wealth tax," if passed, "is likely to be struck down by the Supreme Court.” And Larry Summers (another former Democratic Treasury secretary) proclaimed the wealth tax is something “the Supreme Court has better than a 50% chance of declaring unconstitutional.”

The wealth-tax opponents are far too confident in their assertions.

The Supreme Court agrees to hear about one percent of the petitions litigants file each year. So even if a wealth-tax challenge is ten times more likely to be heard by the court than the average case, it still has a ninety-percent likelihood of languishing in the lower courts. To have the court take up a case (referred to as ‘granting certiorari’) requires four votes from the nine justices. Predicting, years in advance, which specific issues will compel the court to grant certiorari – let alone what the ultimate ruling would be – is often a fool's errand.

This is particularly true with federal legislation. The Court has declared only a small subset of federal laws unconstitutional. While the wealth tax energizes politicians, it may not sufficiently interest the court. 

There are, moreover, sound constitutional arguments on both sides of the question. Opponents of the wealth tax argue it's a “direct tax” under the constitution because it's paid directly to the government (unlike, for example, a sales tax). The wealth tax is therefore unconstitutional, the argument goes, because direct taxes must be apportioned equally among the states – and wealth is unevenly distributed (compare for example the wealth of similarly populated Connecticut and Arkansas).

Proponents of the wealth tax, however, argue that this apportionment principle – rooted in a heavily criticized case from 1895 – is unduly rigid and not constitutionally required. A wealth tax, they say, falls squarely within Congress’s broad and flexible constitutional power to “lay and collect Taxes … for the common Defense and general Welfare of the United States.” Numerous esteemed legal scholars hold this view.

Where, exactly, would each of the nine justices come down in this nuanced constitutional debate? Would the intermediate appellate courts diverge on the issue, thus increasing the odds the court grants certiorari? And would five justices really want to gut a potentially important revenue source for the federal government?

Who knows. With Justices Steven Breyer, Clarence Thomas and Samuel Alito all past seventy, we don’t even know what the composition of the court will be by the time a wealth-tax challenge would be heard.

Arguments against the constitutionality of the wealth tax echo those against the constitutionality of the Affordable Care Act’s individual mandate – which penalized people for not buying health insurance. Many opponents of the ACA confidently argued that the mandate violated existing Supreme Court precedent and infringed states' rights to regulate their own markets.

Yet John Roberts (appointed by George W. Bush) cast the decisive vote upholding the mandate as a constitutional tax. Roberts' opinion illustrated not only the sweeping authority of Congress to impose taxes (including, of course, on the wealthy), but the futility of predicting how the court will interpret controversial legislation.

The Biden administration has ambitious goals on infrastructure and climate change – and a Democrat-controlled Congress to support its agenda. There should be a meaningful public discussion regarding the merits of the wealth tax and its impact on the budget, the economy, and the allocation of wealth in American society. Misleading assertions about the Supreme Court have no place in this important debate.  

William Cooper is an attorney who has litigated the constitutionality of tax provisions before numerous courts.


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