As most readers who follow the 2020 campaign proposals are aware, Elizabeth Warren has proposed an annual wealth tax of 2% for wealth greater than $50 million and 3% for wealth greater than $1 billion. Various pundits have said that the tax is “probably unconstitutional”1 and that the Supreme Court could “stop the wealth tax dead in its tracks.”2
Warren’s wealth tax is constitutional under the standards laid down by the Founders, as this article will demonstrate. Apportionment of a wealth or land tax by population would now require the injustice of substantially higher tax rates in poorer states: when that happens, under the Founders’ standards, the tax is not a direct tax for which apportionment is required. Apportionment was not written to protect wealth from assault, as proponents of its unconstitutionality now claim, but rather to reach wealth by what was thought to be the best then available measure of wealth.
The Constitution, Article I, section 9, clause 4, requires that a “direct tax” must be apportioned among the states by population.3 For the Founders, a necessary element to be a direct tax is that apportionment among the states by population must be reasonable and just. Thus import taxes (the impost), excise taxes, duties, carriage taxes and now real estate and wealth taxes have been expelled from the definition of direct tax, sometimes by the operation of ordinary language and sometimes by Supreme Court decision.
Real estate and wealth taxes were once considered direct taxes because they were the taxes that the states would use to satisfy a requisition and because real estate and wealth were presumed to be equal among the states. Today, however, apportionment of a wealth tax among the states by population is neither just nor reasonable. Wealth per capita in poor Mississippi is under half of the per capita wealth in relatively rich District of Columbia.4 Apportionment by population would mean that tax rates in Mississippi would have to be more than twice the rates in DC. The result would tax residents of poor states much more harshly than residents of wealthy states. That result has no justification in history or policy: it would simply arise by necessity from the fact that Mississippi has a smaller tax base over which to spread its quota. Thus, when it was recognized that wealth and real estate are not equally distributed per capita so that apportionment forced substantially higher tax rates in poorer states, the taxes on wealth and real estate could not be treated as direct taxes. Apportionment would not be just or reasonable.
The Founders believed in wealth taxes: they considered that they would need taxes on wealth for the common defense in the inevitable next war. Various leaders made this clear. The power to provide for the common defense, one J. Choate told the Massachusetts ratification convention, “can be no other than an unlimited power of taxation, if that defence requires it.”5 “Wars have now become rather wars of the purse than of the sword,” Oliver Ellsworth told Connecticut. “A government which can command but half its resources is like a man with but one arm to defend himself.”6 Hamilton put it quite clearly.
A constitution cannot set bounds to a nation’s wants; it ought not, therefore, to set bounds to its resources. Unexpected invasions, long and ruinous wars, may demand all the possible abilities of the country. Shall not your government have power to call these abilities into action? The contingencies of society are not reducible to calculations. They cannot be fixed or bounded, even in imagination.7
No hobble that made wealth taxes impossible would have been tolerated at the time, and apportionment, which was only intended to provide a reasonable formula for calculating tax shares when workable, would have been a hobble. The idea that Congress would nonetheless have to raise federal taxes by an intolerable injustice when it badly needed the tax revenues misunderstands what the Constitution is about. The consequences of apportionment by population when the per capita tax base is uneven rebuts the use of apportionment.
The Rise of Allocation by Population
The term “direct tax” first appeared in America in reference to requisitions—that is, taxes directly on the states—under a pre-Constitution 1783 proposal to reform the Articles of Confederation.8 The 1783 proposal had two elements: (i) requisitions upon the states, which was called “direct tax” and (ii) a new national tax on imports, the “impost,” which was called an “indirect tax.”9 Under the Articles, the Congress had no power to collect tax revenue from any individual or transaction other than through requisitions on the states. The Articles determined state quotas under a requisition according to the value of real estate and improvements within the state.10 The formula did not work well. Pennsylvania put in assessments that cut its quota to half of Virginia’s, and the other states thought that Pennsylvania was cheating by trying to pay less than its fair share.11 The Congress, however, had no employees nor means to correct the assessments of value submitted by the states.12 The 1783 proposal was to amend the allocation formula by using the population of the states to determine a state’s wealth.13 In allocating state tax between Philadelphia and the rest of Pennsylvania or between Boston and the rest of Massachusetts, the Framers found, it made no substantial difference whether the state used population or real estate value.14
At the Constitutional Convention, Madison argued that population would inevitably be a sufficient measure of wealth, as long as movement of people was allowed, because people move to the cities and fertile farm land where wealth was to be had, so the more people a state had, the wealthier the state would be.15 Because states could and would cheat on real estate valuations, population was seen as the best estimate the Founders had for relative wealth. Measuring wealth by population was not intended to force a head tax, an equal amount of tax on each person, since the Founders abhorred the idea of a head tax, calling it “odious” and “abhorrent.”16 The number of persons was merely used as a reasonable index of wealth, John Adams said, and not the thing to be taxed.17 Allocation by population was not a protection of wealth “against assault by mere force of numbers,” as the Supreme Court later erroneously said in Pollock v. Farmers Trust,18 but in fact a means of reaching for wealth—assaulting wealth—using population as a proxy for wealth.
There was a hard fight in 1783 between North and South as to how much slaves contributed to wealth for the purpose of allocating requisitions. The South argued that slaves contributed only half as much as free persons did to a state’s wealth, as demonstrated by the fact that wage rates in the South were half of wage rates in the North.19 The North argued that slaves contributed at least what free persons did to a state’s wealth because free northern farmers did not continue to work following the first freeze and northern women did not work in the fields.20 The 1783 proposal compromised by counting slaves at three-fifths of a person, both sides “despairing of doing any better.”21
The 1783 proposal never took effect as proposed. The Articles of Confederation required unanimous consent of all the states for an amendment to take effect.22 New York vetoed the 1783 proposal for a reason unrelated to the apportionment formula for requisitions: it wanted to preserve New York’s exclusive right to tax New York harbor traffic, which it had already begun to do.23 New York’s veto of the impost proposal is plausibly the proximate cause of the Constitution because the nation desperately needed the impost tax revenue. As Hamilton put it, “impost begat convention.”24 Even so, population (with the 3/5ths ratio) was carried over into the Constitution as a measurement of wealth, because it was a settled compromise between North and South over a hot wire issue—how much slaves contributed to wealth.
The impost that was included in the 1783 proposal was not a direct tax because the imports that landed at the docks of one state were distributed to many states, making it impossible to determine which state should get credit for the tax against its quota. A tax that could not reasonably be allocated among the states was not a direct tax, so direct tax and impost were opposites.25 With the failure of the 1783 proposal, all federal taxes allowed before the Constitution was adopted were direct taxes because the Congress had only the power to raise revenue by requisitions, that is, taxes directly on the states.
The term “direct tax” came to refer to internal or dry land taxes imposed by the states.26 These were state taxes that would be used by the state to satisfy a requisition, as evidenced by a 1796 Treasury inventory of “Direct Taxes”—a list of the existing state taxes—to prepare for a proposed federal requisition to be imposed on the states.27 In the debates on constitutional ratification, the speakers could not accurately list all the state taxes, even for their home states, but they did know the functional definition that direct taxes were the state taxes that were part of the requisition system.
Expelling from “Direct Taxes” Those Not Reasonably Apportioned
As noted, “direct tax” under the Articles included all federal taxes because Congress could raise tax revenue only by requisitions on the states. Over time taxes that could not reasonably be apportioned among the states were expelled from being considered a direct tax, by ordinary language usage or Supreme Court decision. Consistently over time, a direct tax required ease of apportionment, and recognition that some taxes were not apportionable changed with time.
The Constitution gave the national government its own power to tax “to provide for the common defense and general welfare”28 without need for requisitions, but many assumed requisitions would continue as the primary federal tax system.29 The Constitution also gave the national government exclusive authority over the impost, ending state imposts.30 The Constitution picked up the 1783-proposed federal ratio counting slaves at three-fifths if Congress should choose direct taxes on the states.
“Excises” and “duties” were expelled from “direct tax” by silent operation of ordinary language because it was simply not possible to apportion them among the states by population. Early in the ratification debates, important speakers used excises and duties as examples of a direct tax.31 Excise taxes and duties were internal taxes that were part of the package of state taxes used to satisfy requisitions, the federal taxes on the states in the status quo system that the Constitution was changing. James Madison, the most important shaper of the Constitution, called the excise tax on whiskey a direct tax32 and assumed that duties, i.e., the stamp tax, would have to be apportioned.33 John Taylor of Caroline argued that the carriage tax was a direct excise tax that could not be imposed unless apportioned by population.34
Treating excises and duties as apportionable was impossible once the Constitution was adopted. The Constitution requires that excises and duties have uniform rates across all states.35 One cannot simultaneously comply with uniform rates in all states and also apportion the tax to the states by population, especially counting slaves at three-fifths.36 If the federal government has the power to lay excises or duties, which the Constitution authorizes, then excises and duties can no longer be “direct” taxes. As the ratification debates went on, it became more common to see excises and duties explicitly excluded from the meaning of direct tax.37 They were eliminated from the category of direct taxes once speakers realized they could not be apportioned, without any court holding or attention given to the expulsion. Common sense had already expelled the impost under the 1783 proposal from direct tax because the tax paid could not be conveniently allocated to a state: the expulsion of excises and duties was consistent. Apportionability was a defining characteristic of a direct tax.
In 1796, in Hylton v. United States,38 the Supreme Court held that a carriage tax was not direct because apportionment of the tax by population was not reasonable or just. Carriage taxes were listed under the Treasury’s 1796 direct tax inventory,39 and they were common taxes in the states.40 Under Hamilton’s hypothetical, New York had 10 times as many carriages per capita as Virginia. Virginia rates on carriages therefore would have to be 10 times higher than N.Y. rates if apportionment were required. Virginia had too few carriages over which to spread its quota determined by population. Requiring apportionment in this case to impose 10 times higher taxes in Virginia than New York was unjust. Indeed, any time the tax base varies per capita from one state to another, apportionment by population would unfairly require higher tax in the state with the smaller per capita base. The situation could be even more absurd. If Kentucky has no carriages, for example, then the state’s entire quota would descend on the first carriage crossing the state line. The carriage tax would make no sense if it had to be apportioned by state population.
The Hylton court wisely held that carriage taxes were not direct taxes as a matter of law because apportionment was not reasonable. As Justice Chase put it, “the Constitution evidently contemplated no taxes as direct taxes but only such as Congress could lay in proportion to the census. The rule of apportionment is only to be adopted in such cases where it can reasonably apply.”41 “As all direct taxes must be apportioned,” Justice Iredell wrote, “it is evident that the Constitution contemplated none as direct but such as could be apportioned.”42 Hylton is a functionalist definition of direct tax that looks not to the object of the tax in question, but whether the tax can be reasonably apportioned. Each of the Justices in Hylton had participated actively in the originating debates on apportionment and each contributed at least a few paragraphs to the historical record.43 They were the Founders, and they knew the history. They were in a personal position to say, “apportionment with that effect is not what we meant.”
The Hylton functionalist definition of direct tax was settled doctrine for the next 100 years. In 1868, the Supreme Court held that a Civil War tax on the income of insurance companies was constitutional although not apportioned.44
The consequences which would follow the apportionment of the tax ... in the manner prescribed by the Constitution, must not be overlooked. … . Where [insurance] corporations are numerous and rich, it might be light; where none exist, it could not be collected; where they are few and poor, it would fall upon them with such weight as to involve annihilation. It cannot be supposed that the framers of the Constitution intended that any tax should be apportioned, the collection of which on that principle would be attended with such results. The consequences are fatal to the proposition.45
In 1875, in Scholey v. Rew,46 the Court held on the same logic that a tax on succession by death was not direct.
If all taxes that political economists regard as direct taxes should be held to fall within those words in the Constitution, Congress would be deprived of the practical power to impose such taxes, and the taxing power would be ... crippled; for no Congress would dare to apportion, for instance, the income tax.47
Finally, in Springer v. United States48 in 1881, the Court held that the Civil War income tax on individuals was not direct on the logic and authority of Hylton.
It was well held [in Hylton] that where such evils would attend the apportionment of a tax, the Constitution could not have intended that an apportionment should be made. This view applies with even greater force to the [income] tax in question in this case. Where the population is large and the incomes are few and small, it would be intolerably oppressive.49
The ill consequences of apportionment determined that it would not be required.
Real Estate Tax
A tax with a base that is equal or nearly equal per capita among the states can be apportioned by population without causing the drastically higher tax rates where the tax base is thinner. It was presumed in the early history of the issue that real estate value was equal per capita across the states, and that a real estate tax would qualify as a direct tax.50 The presumption could not be challenged because of administrative and political considerations. The sponsors of the 1783 proposal sought to replace allocation of requisitions by value of real estate with allocation by population. They assumed that population and land value were sufficiently equal to each other because they wanted to tax wealth (mostly at the time attached to land) but could not accurately determine land values for tax purposes. The 1783 proposal also worked within a system in which the only tax Congress had was requisitions, so all federal taxes at the time were direct taxes that had to be apportioned among the states. Similarly, the 3/5ths rule was a political settlement of a dangerous fight that no one was willing to reopen, so the presumption was that population (counting slaves at three-fifths) measured wealth.
The presumption was also forced by the need for coalition in the Constitutional Convention. The key nationalists, Madison and James Wilson, hated the rule of equal votes per state under the Articles of Confederation because it gave too much power to states with low population and too little to states with a high population.51 To defeat that rule, even just in the House of Representatives, the nationalists needed the votes of a large minority contingent at the Convention who believed that votes in Congress should be determined by wealth.52 The dispute between those who believed that the House should represent wealth and that the House should represent people was settled on the assumption that the wealth and population of states would always be the true measure of each other.53
At some point in history, however, this presumption of equality of wealth and population had to be cast aside. Real estate and wealth taxes ceased to be direct taxes because per capita wealth or land value so varied among the states that apportionment by population would require drastically higher tax rates in poorer states. Drastically higher tax rates required by apportionment by population entails that apportionment is not required because the tax is not direct.
To be sure, the Anti-Federalists opposed a federal direct tax—by which they meant a dry land or internal tax other than the impost. In fact, opposition to a federal direct tax was the topic most popular to the opposition. Future President and Anti-Federalist James Monroe declared that to render the Constitution safe and proper, he would take away one power only – “I mean that of direct tax.”54 But Anti-Federalist opposition to direct taxes had no influence on the constitutional text. The Federalist victors in the Constitutional Convention were not about to limit the taxing power of the new national government. As Washington explained to Jefferson in far-off Paris, if the new Congress was not to have the direct tax, how was it to repay the war debts and redeem the Congressional honor? If it did not have the direct tax, the country might as well revert to the confederation form.55 No hobble on federal tax was intended or tolerable in the adoption of the Constitution.
In 1895, in Pollock v. Farmers’ Loan & Trust Co.,56 the Supreme Court ruled that a federal tax on income was a direct tax that had to be apportioned, overruling 100 years of wise precedents going back to the Founders. The majority made up a “pseudo history”57 and rationale for the apportionment rule, saying that it was designed “to prevent an attack upon accumulated property by mere force of numbers.”58 Justice Field announced, apocalyptically, that the income tax’s assault upon capital is but a stepping-stone to others, leading to a war of the poor against the rich. “If the court sanctions the [graduated income tax], it will mark the hour when the sure decadence of our present government will commence.”59 Apportionment, the majority opinion said, was “one of the bulwarks of private rights and private property.”60
Pollock is an ignorant misreading of history and the meaning of the apportionment clause, as discussed in the prior sections to this article. The Founders’ purpose for the apportionment clause was not to protect wealth from the force of mere numbers but rather to apportion a requisition to reach the wealth of the states. Population was considered an appropriate index of wealth. Apportionment was not an individual taxpayer right vis a vis the government, but a means of allocating taxes in a way that could reach that wealth. The rules regarding direct taxation were never intended as an impediment on the taxing power of the United States.
Pollock is also a condemnation of close reading of text as a sufficient ground for constitutional adjudication, without an understanding of the history of that text. If you know nothing about the history or original function of the direct tax, then it is easy to misinterpret the language “apportionment by population” as if it were forcing the same amount of tax per person and protecting wealth from mere numbers. That turns the original constitutional meaning upside down.
In any case, Pollock was bad history when it was decided, and it quickly became a pariah and shrank in importance. Justice Harlan described Pollock at the time as the “decision [that] will become as hateful with the American people as the Dred Scott case.”61 Looking back, Oliver Wendell Holmes, Jr. judged that Pollock was an inappropriate overreaction to the populist William Jennings Bryan, a vague terror that was translated into “doctrine that had no place in the Constitution.”62 Almost immediately the Supreme Court began retreating from what it later called its “mistaken theory” in Pollock,63 by expanding the definition of “excise tax” elastically to include taxes that were obvious assaults on wealth, including the estate tax,64 a corporate gross receipts tax,65 the corporate income tax,66 and a tax on Chicago Board of Trade commodity transactions.67 The elastic expansion of “excise” to avoid apportionment of the tax was solely a tool to confine Pollock to its facts because the original 1787 meaning of “excise” meant only a tax on whiskey68 and other sins.69 The Sixteenth Amendment, passed by two-thirds of both houses of Congress and ratified by three-quarters of the states, allowed a tax on income without apportionment, putting the last nail in Pollock’s coffin.
The Founders believed in the wealth tax. Apportionment was designed to reach wealth by taxing states according to a proxy for relative wealth, using the best measurement of wealth that was then available. To turn a requirement designed to make it easier to tax wealth into a rule exempting wealth from taxation is to turn the Founders’ meaning upside down. The progressive idea of a wealth tax, like the estate tax, is clearly constitutional. ■
Short-form cites to documentary collections
The Papers of Alexander Hamilton (Harold C. Syrett ed., 1961–87), 27 vols.
Documentary History of the Ratification of the Constitution (Merrill Jensen, John P. Kaminski & Gaspare J. Saladino ed., 1976), 29 vols.
Debates in the Conventions of the Several States on the Adoption of the Federal Constitution (Jonathan Elliot ed., 1907), 5 vols.
Records of the Federal Constitution of 1787 (Max Farrand ed., ev. ed. 1937), 4 vols. Citations are to Madison notes unless otherwise specified.
The Federalist (Jacob E. Cooke ed., 1961). Dates cited are to first appearance in New York newspapers.
Writings of George Washington (John C. Fitzpatrick’s 1931-1944). 14 volumes.
Journals of the Continental Congress, 1774–1789 (Worthington C. Ford et. al. ed., 1904–37), 34 vols.
Papers of James Madison (William T. Hutchinson & William M.E. Rachal eds., 1962–1991), 17 vols.
Letters of Delegates to Congress, 1774–1789 (Paul H. Smith et. al. eds., 1976–2000), 25 vols.
The Papers of Thomas Jefferson 650 (Julian P. Boyd ed., 1958) 42 vols.