Joe Biden has released a plan to tax unrealized gains — which the federal government doesn’t usually doesn’t tax, because it isn’t really income — for households worth more than $100 million. Such unrealized gains are hard to estimate with precision, and billionaires would probably pay their accountants a fortune to avoid paying a tax on them. It also may be unconstitutional for the federal government to tax them, since taxing them is not an income tax (which is permitted by the Sixteenth Amendment), nor does it satisfy the requirements for other direct or indirect taxes laid down in Article I of the Constitution. Unlike state governments, the federal government doesn’t have the power to levy a property tax or wealth tax, according to leading constitutional lawyers.
Reason magazine reports on Biden’s new tax proposal, and how he himself once viewed it as radical and extreme:
In December 2019, when Joe Biden, still campaigning for the Democratic presidential nomination, released his tax plan, much of the coverage focused on the contrast between his comparatively plan and the plans issued by his more progressive rivals. A CNBC report on his plan was labeled “wealth tax wars.” A Washington Post headline noted that Biden’s $3.2 trillion tax plan highlighted “divisions” with Sens. Bernie Sanders (I–Vt.) and Elizabeth Warren (D–Mass.). Among the starkest of those divisions was that the former vice president had rejected calls by Warren and Sanders to back a wealth tax on the richest Americans.
On the campaign trail, Biden himself played up that contrast. Among the criticisms lobbed at the Sanders and Warren wealth tax proposals was that they were fundamentally punitive, because they taxed wealth of a small, specific group of individuals. He told a wealthy crowd of supporters in Los Angeles that while they shouldn’t expect a tax cut from him, there would be “no punishment either.”
Around the same time, a CNBC reporter asked Biden about arguments—some of which came from experts friendly to Democrats—that the wealth taxes proposed by his rivals would be unworkable and punitive. In response, Biden allowed that “parts of the plan, those objections apply.” He complained about divisive tax policy, and rejected the idea of a “a single tax, on a single group of people.” Earlier in the interview, Biden, without prompting, went out of his way to insist that “tax policy is not about punishment.”
Biden was running as the moderate in the race. His goal was to separate himself from the progressives. So he rejected the idea of a tax policy that he saw as divisive, punitive, and potentially unworkable.
Yet now, as president, Biden has embraced a wealth tax of his own. In his latest budget plan, Biden proposed something the White House has dubbed the “Billionaire Minimum Income Tax,” which applies to all income, realized and unrealized, for households worth more than $100 million. The Biden administration is framing this as a form of “prepayment” on future capital gains—which is to say it’s a form of taxation on money that someone has not actually seen, based on the value of their holdings. It’s not exactly the same as the wealth taxes proposed by Warren and Sanders, but it’s designed around the same fundamental idea: the taxation of personal wealth, rather than of cash income, which often takes the form of difficult-to-value assets.
Most of the same criticisms that applied to the Warren and Sanders plans still apply: Biden’s plan probably wouldn’t raise nearly as much money as the administration assumes: Wealth taxes are exceptionally difficult and resource-intensive to administer, which is why most OECD countries that have implemented wealth taxes eventually dropped them. It’s also quite likely to be unconstitutional. At minimum, if it passed, it would be tied up in court.
As the National Taxpayers Union notes, European countries have abandoned wealth taxes reminiscent of Biden’s tax as inefficient or unworkable, and such taxes appear to be unconstitutional when imposed by the federal (as opposed to state) government:
Though France canceled its wealth tax in 2018 after facing brain drain, capital flight, and revenue losses, and all but three European nations have repealed theirs after concluding it was a policy failure, the idea remains a priority for the American left….But while NTUF has documented the many administrative and economic issues with a wealth tax in the past, perhaps the most important issue to resolve with such a tax is whether it is even constitutional. Understanding the shaky legal foundation on which a wealth tax stands, Warren commissioned letters back in March from 14 law professors who endorsed its constitutionality. Are they right?
The Constitution is Clear: Unapportioned Direct Taxes are Unconstitutional
A wealth tax would be an unapportioned direct tax and therefore unconstitutional. The U.S. Constitution allows the Congress to “lay and collect Taxes, Duties, Imposts and Excises” with two explicit conditions relevant here. First, all duties, imposts, and excises “shall be uniform throughout the United States.” Second, “Capitation, or other direct, Tax[es] shall be…in Proportion to the Census.” In short, all federal taxes must be geographically uniform but direct taxes must be apportioned.
Apportioned means that a tax is levied in proportion to each state’s population. If California constitutes 12 percent of the U.S. population, then Californians pay 12 percent of an apportioned tax. If Mississippi constitutes one percent of the U.S. population, then Mississippians pay one percent of an apportioned tax.
