Bloomberg Tax
July 27, 2021, 8:01 AM

Wealth Taxes Can’t Satisfy Constitutional Requirements

Erik M. Jensen
Erik M. Jensen
Case Western Reserve University School of Law

President Joe Biden’s American Families Plan includes a hidden wealth tax. And with the recent ProPublica report about taxes paid (or not paid) by the wealthiest Americans, the idea of taxing wealth, not just income, has gained greater attention among policymakers and the media. Proponents ultimately will nevertheless be forced to confront the fact that a direct tax on wealth would be unconstitutional.

Before the ProPublica report, many commenters had focused on the administration’s proposed hikes in rates for individuals, including on capital gains, and on corporate income. But few noticed that the plan also includes a startling proposal to tax assets held in traditional trusts. Were it constitutional, this could fundamentally change the income-tax system as we know it.

The Biden proposal may not go as far as Sen. Elizabeth Warren’s (D) call for a national wealth tax or Sen. Ron Wyden’s (D) proposal to require capital assets to be annually marked to market, with any increases in value taxed as income. President Biden’s plan nonetheless contains a tax that would apply to the unrealized appreciation found in many trusts, which Americans have long relied on to pass family businesses, including farms, to later generations. While the details in the administration’s official explanation differ from two similar bills introduced this year by Sen. Chris Van Hollen (D) and Rep. Bill Pascrell (D), all three proposals would tax appreciation in the value of assets that have been held in trust.

The proposals would “deem” such appreciation to have been realized, even though no sale has occurred. Worse yet, the tax would be imposed on asset appreciation in trusts that were created decades ago, when no one could have imagined these proposals. Left unsaid is how trusts are expected to pay the tax without liquidity from an actual sale.

Congress has never done anything quite like this, because it has long been recognized that, as a matter of constitutional law, Congress can’t treat unrealized appreciation as taxable income. In 1920, the U.S. Supreme Court concluded that, under the 16th Amendment, there must be some actual transfer of rights before Congress can tax appreciation as income. Sell appreciated property and you realize the gain. But just hold on, and there’s no income to tax. The ProPublica report measures effective tax rates by assuming that unrealized increases in wealth are the same as income. That point may have polemical power, but it’s not the law.

A tax on property’s increase in value is a tax on the property itself. And a tax on property is a direct tax under the Constitution. Even if you’re old enough to have taken a civics course—very old—you probably didn’t study the Direct Tax Clauses. But with this forced-realization proposal on the agenda, and with renewed calls for a national wealth tax, you should.

The Constitution allows for direct taxes, but requires they be apportioned among the states by population. That means a state with one-twentieth of the population must pay one-twentieth of the aggregate tax. And if two states—one poor, one rich—had identical populations, the rates for this national tax would have to be higher in the poorer state than in the richer one. Crazy.

The Framers intended apportionment to be a serious limitation on Congress’s taxing power, and it is. Congress shouldn’t enact a tax with such results—which would be inconsistent with the purpose of a national wealth tax.

The history: It’s been understood since our founding that a tax on real estate is direct (see The Federalist Papers and the Supreme Court’s 1796 decision, Hylton v. United States, 3 U.S. (3 Dall.) 171 (1796). In fact, Congress actually apportioned several real-estate taxes between 1798 and 1861. And in 1895, in Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1985) and Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601 (1985), the Supreme Court applied this limitation to strike down the unapportioned 1894 income tax on the ground that it directly taxed income from all property, not just real estate. In response, the 16th Amendment eliminated the apportionment requirement for “taxes on incomes” and made the modern income tax possible. But the amendment intentionally left in place apportionment for other direct taxes, including one on property value.

Some may dismiss these constitutional constraints as ancient history, but the Supreme Court recently reaffirmed them. In the controlling opinion in NFIB v. Sebelius, 567 U.S. 519 (2012), Chief Justice John Roberts confirmed this black-letter law in the course of recharacterizing Obamacare’s individual mandate penalty as a tax. That was only nine years ago, and subsequent changes in the court have made it even more likely that a majority today would enforce the Constitution’s original understanding.

If Congress were to adopt a wealth tax without apportionment, the tax would inevitably be challenged. The court would likely hold it to be unconstitutional, and an unconstitutional tax doesn’t raise revenue. Congress would be wise not to build major tax changes on a shaky foundation.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Erik M. Jensen is the Coleman P. Burke Professor Emeritus of Law at Case Western Reserve University.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at

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