Bernie’s wealth tax proposal would drain the economy

OPINION:

Sen. Bernard Sanders, Vermont independent, and Rep. Ro Khanna, California Democrat, recently introduced wealth tax bills in the Senate and House. There’s bad policy, and there’s unconstitutional policy. This is both.

We already tax income, especially that of high-earning Americans.

IRS data shows that in 2023, the average taxpayer in the top 5% paid 182 times more in income taxes than the average taxpayer in the bottom 50%. Now, Messrs. Sanders and Khanna also want to tax the wealth the rich have accumulated.

Picture a stream as the only source of water feeding a reservoir. An income tax is like diverting 5% of the stream’s water from the reservoir; it reduces the amount that comes in. A wealth tax is like draining 5% of what is already in the reservoir; the water level continually drops if it’s not replenished.

Mr. Sanders has said that billionaires shouldn’t exist, and his wealth tax seems designed to achieve that goal.

In the early 1990s, wealth taxes were relatively common across the developed world, with a dozen countries imposing them. Most imposed a wealth tax rate of 1.5% or less, well below what Messrs. Sanders and Khanna want.

Even at that lower rate, the taxes drove capital out of those countries and failed to deliver the expected revenue increases. Economist Eric Pichet has estimated that France’s wealth tax cost his country twice as much in revenue lost because of capital flight as the amount of revenue the tax generated.

After driving away the wealthy and proving more administrative trouble than they were worth, the wealth taxes imposed in the early 1990s by nine countries have since been repealed.

The truth is that we would miss the wealthy if we ever lost them. Most billionaire wealth exists only on paper in the valuations of the companies they own. Confiscating billionaires’ wealth would take capital from businesses that employ tens of millions of Americans. It wouldn’t just hurt the billionaires; it would also drain the productivity and vitality of the American economy.

Even if a wealth tax made any economic sense, would Congress enact it? In its famous Marbury v. Madison decision, the U.S. Supreme Court in 1803 said that “an act of the legislature, repugnant to the Constitution, is void.”

Under the 10th Amendment, the federal government may exercise only the powers delegated to it, which include those listed in Article I and others that are “necessary and proper for carrying in Execution” the listed ones.

Although the Constitution gives Congress the power to “lay and collect Taxes,” different types of taxes are subject to different restrictions. “Direct” taxes, or taxes directly on people or property, must be “apportioned among the several States … according to their respective Numbers.”

Congress may impose a direct tax only if each state’s portion of the revenue from that tax matches its portion of the national population. A wealth tax is a direct tax and, therefore, must be apportioned.

The Sanders/Khanna proposal aims to make any provision for this necessary apportionment, and it couldn’t achieve its goal if it did. A state with lots of rich people, for example, might meet its apportioned share of revenue from a wealth tax with a more moderate tax rate, while a state with few rich people might have to impose a draconian tax rate to meet its revenue obligation.

America’s Founders were especially wary of how the government could wield its taxing power and even threw a tea party in Boston back in 1773 to express their feelings. Another clue came in 1819, when the Supreme Court in McCulloch v. Maryland famously said: “That the power to tax involves the power to destroy … [is a proposition] not to be denied.” 

Professors David Schizer and Steven Calabresi published a deep dive last year into the constitutionality of wealth taxes. They concluded: “If Congress wants a more redistributive tax system, the income tax … can be adjusted [or] Congress can raise the [estate tax] rates on wealthier households. … But … one step that is not available is an unportioned wealth tax.”

A wealth of evidence shows that a wealth tax would eat away at both the engines of our national prosperity and the rich legal foundations that have made America the greatest nation on earth.

• Thomas Jipping is a senior legal fellow with the Meese Institute for the Rule of Law at Advancing American Freedom. Preston Brashers is a research fellow with the Plymouth Institute at Advancing American Freedom.