As part of her push for the 2020 presidential campaign, senator Elizabeth Warren (D., Mass.) is due to announce a plan for a wealth tax on assets over $50 million. Advised by economists Emmanuel Saez and Gabriel Zucman of Berkeley, she proposes a 2 percent rate, which increases to 3 percent for those with over $1 billion in assets. But while there may be good arguments for wealth-based taxation systems, the constitution forbids them in the U.S. Its prohibition on “direct taxes” mean that a ‘clean’ wealth tax set simply by percentage is impossible. To remain constitutional, a wealth tax would have to take on a deeply distorted form, one that would place a heavy burden on poor states.
Without an unlikely constitutional amendment, this is what would happen. Because a direct tax must be “apportioned among the several States” according to “the Census or Enumeration herein”, the total revenue of the tax would have to be decided beforehand by the government, and then apportioned to each state by population, not by any wealth-related measure. So if a state contains 10 percent of the national population, it will pay 10 percent of the tax, regardless of wealth.
As Matthew Franck pointed out on Bench Memos in 2012 (emphasis added):
It gets worse. Take two states close to one another in size. Maryland, in the 2010 census, had 5,773,552 people, or 1.87% of the population, while Missouri had 5,988,927 people, or 1.93% of the nation. Pretty close, right? Missouri residents, collectively, would have to pay more than Marylanders under Altman’s wealth tax. But according to the “Quick Facts” at the Census Bureau, Maryland in 2010 was a much wealthier state than Missouri. Incomes were higher in Maryland, with $34,849 per capita, as against $24,724 in Missouri, and $70,647 median household income in Maryland as against $46,262 in Missouri.
What about the wealth Altman wants to tax? Take real estate. Home ownership rates were about the same (69% in Maryland, 70% in Missouri), but housing values were $329,400 in Maryland, and only $137,700 in Missouri. Yet according to the constitutionally required formula, Missourians collectively will have to pay about the same, or a little more, in federal wealth tax, than Marylanders. This means that the tax rates on assessed values of property will have to be much, much higher in Missouri than in Maryland, in order to raise the same quantity of revenue.
Not only would this tax system put a relatively heavy burden on poor states, the fact that tax incidence is determined by population means that the wealthy can move their assets to states with different tax burdens.
Franck continues:
Wealthy people will be able to move their assets to new locations where, thanks to the clustering of others like themselves, they will individually pay far less than they would have in poorer states. In the poor states they leave behind, the threshold at which the tax kicks in will inevitably have to be lowered, creating a brand new class of equality problems.
Saez, Zucman, and Altman before them have posed an interesting theoretical system. However, because it is impossible without a constitutional amendment, which Senator Warren is likely aware of, its presence in her platform is a conscious lie of a campaign promise. It is entirely possible that the senator could push for a constitutional amendment. But even leaving aside the unlikelihood of a successful amendment, the time horizon means that, as a campaign idea, it is disingenuous.