Why taxing the wealth of American billionaires – as Biden tried to do – will never work – Philippine Canadian Inquirer
The speed with which a tax on billionaires came and went as a means of paying for President Joe Biden’s economic agenda shows why it is so difficult to tax wealth in the United States
Democrats unveiled their proposal on October 27, 2021, and it was defeated the same day, replaced with a surtax on millionaire income.
The idea of taxing the fortunes of the richest Americans has been debated for some time, and perhaps with good reason from a tax perspective. The total wealth of US billionaires soared by US $ 1.8 trillion during the COVID-19 pandemic in mid-August. And recent reports have revealed that despite their massive wealth, billionaires tend to pay very little in taxes.
As an expert in tax policy, I have found that there is one big obstacle to wealth tax: the Constitution.
Income and wealth inequality
Concerns about inequalities have grown in recent decades.
Americans experienced substantial economic growth and widely shared prosperity from the end of World War II to the 1970s.
But in the 1980s, President Ronald Reagan dramatically cut taxes for the rich – twice – by slashing the top wage rate from 70% to 28%.
Studies have shown that lower income and corporate tax rates, combined with other ‘knock-on’ policies such as deregulation, have resulted in steadily rising incomes for wealthier Americans and inequalities in wealth. .
The richest 1% controlled 39% of all wealth – including all cash, real estate, stocks, bonds and other investments – in 2016, up from less than 30% in 1989. At the same time, The poorest 90% held less than a quarter of America’s wealth, up from over a third in 1989.
Currently, the federal government taxes all income over $ 518,400 at 37% for single filers, with an additional investment tax of 3.8% on income over $ 200,000. Of course, as a cache of ProPublica tax documents shows, loopholes and tax dodges result in significantly lower actual tax rates.
The problem of taxing wealth
Unlike an income tax, a wealth tax affects both wealth and income inequality.
But there are strong arguments that a federal wealth tax is unconstitutional. Wealth taxes violate Article I, Section 2, Term 3 of the United States Constitution, which prohibits the federal government from assessing “direct taxes” that are not distributed equally 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 and constitutional tax due to the 16th Amendment, which specifically allows unallocated income taxes. When it comes to property, you might notice that only states and cities levy property taxes. In almost all cases, the federal government cannot tax real estate or any other form of wealth in the absence of a transaction.
Supporters of a wealth tax, such as US Senator Elizabeth Warren of Massachusetts, cite a small group of law professors who support his claim that a wealth tax is passing the constitutional course. But the argument against constitutionality is strong enough that a challenge to the Supreme Court will surely follow any attempt to adopt a wealth tax.
Barring a victory in the conservative Supreme Court or a tough constitutional amendment, the federal government is excluded from the taxation of wealth.
A rising tide
I agree with progressive lawmakers that the United States should return to economic policies that seek to lift all boats.
Although America’s wealth and productivity have grown over the past 40 years, most Americans haven’t seen their lot improve as much as the wealthy – and pay higher tax rates. In 2020 alone, America’s billionaires saw their wealth increase by $ 560 billion, even as tens of millions of people were unemployed or depended on donated food for enough to eat.
The US tax system is at least partly responsible for these discrepancies. While a wealth tax may not be a viable solution, there are other ways, such as higher income tax rates for the well-to-do or a wealth transfer tax that follows. focuses on transferring wealth to the heirs of a billionaire. These approaches could not only help solve the problem of inequality, but would also be in accordance with the law.
This is an updated version of an article published on June 9, 2021.
Beverly Moran, Emeritus Professor of Law, Vanderbilt University
This article is republished from The Conversation under a Creative Commons license. Read the original article.