And so the word went forth. But the word is, to say the least, a bit confused. For why, one might ask, is a federal tax on the wealth of the living unconstitutional, but an estate tax on the wealth of the dead constitutional?
Here we have a truly marvelous structure founded on split hairs.
Federal, as opposed to state, inheritance taxes have a long history. They were first implemented in the Civil War. Even then there were voices raised – voices rich with port, steak, and oysters, voices that were filtered through cigar smoke – that such a tax was a direct tax, and thus unconstitutional, under the provision of the tax and spend provision of the Constitution in Article one, section 8, which reads that Congress has to the power : “to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common defence[note 1]and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”
The rub, here, is twofold. On the one hand, are there taxes that discriminate against certain states – that violate the uniformity condition? And are the taxes indirect – for instance, duties, imposts and excises – or direct? Direct taxes seem to be limited by section 9, which reads: ” no capitation or other direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken.” And so we have some rather abstruse questions to deal with in this matter of direct vs. indirect – or as one scholar has put it, taxing a measure as opposed to taxing a substance. This question is as delightful to tax lawyers as the old question about the heads of pins and angels was to your medieval theologian. It is through the notion of excise – which has been taken to mean any tax that can be construed as indirect, such as corporate income tax – that much of our modern system was driven. Historically, the Court has sided as much as it dares with the country club – in the gilded age and down through the thirties, the Court hated to see Mr. Moneybags burdened with pesky national taxes. This is, in fact, why income tax had to come into our world through a constitutional amendment.
The Supreme Court of the thirties, as is well known, viewed New Deal legislation with horror, and sought to limit Congress’s power to impose regulatory taxes – for instance, on child labor, or as part of a scheme to pay farmers to produce less. Though Roosevelt never succeeded in creating more members of the Supreme Court – which, in spite of the term “packing”, was a common occurrence, as the Supreme Court originally started out with six members. The number nine has no mystical signification. In any case, the SCOTUS has never set itself athwart the current of history and yelled stop – for too long. Thus, in the wake of the New Deal, the Court grudgingly allowed Congress to increase the scope and intention of taxes. In fact, even back in the days of the progressive movement, a famous case, McCray vs. U.S. (1904) endorsed a principle that rules most legal decisions about taxes today:
“The judiciary is without authority to avoid an act of Congress lawfully exerting the taxing power, even in a case where, to the judicial mind, it seems that Congress had, in putting such power in motion, abused its lawful authority by levying a tax which was unwise or oppressive, or the result of the enforcement of which might be to indirectly affect subjects not within the powers delegated to Congress; nor can the judiciary inquire into the motive or purpose of Congress in adopting a statute levying an excise tax within its constitutional power.”
Every major national tax has, it should be noted, been greeted by a chorus of apologists for the wealthy, claiming that it isn’t constitutional. For instance, national corporate taxes, which were enacted as an “excise”, were called no such thing by various distinguished writers in the press back in the 1900-1909. The question for Warren’s tax on the wealth proposal is where it falls in the meshes of previous tax legislation. This is a question that should make us think back – in an extended flashback, a very exciting sequence! – to the Estate Tax of 1916, and its successors.
There is an excellent article by our foremost tax historian, W. Eliot Brownlee ( The proceedings of the American Philosophical Society, 1985) on the forces that came together to push through the tax on estates in the 1916 Congress. Among those forces were the progressives and the single-taxers – the latter being convinced that a single land tax, as advocated by Henry George, should produce a leveling affect that would cripple monopoly power. It was towards the question of monopoly power and its attendant ills – most notably, a widening gap between the wealth of the wealthiest and that of the working man – which powered the reforming tax legislation in that session of Congress. On the other hand, there was Wilson’s attempt to prepare for war, with massive new military expenditures. Meanwhile, the Republicans were pitching for a decreased income tax, increased sales taxes, and raising the tariff. If we look back from our own kaleidoscope of ideological preferences and blindly match them to these actors in the past, we will get the general pattern wrong. Remember, the Republicans of that time were split between the Western wing, which was progressive, Rooseveltian, and ardently opposed to war, and the Eastern wing, which was pro-big business. On the Democratic side, many were as opposed to war. However, they blamed the conflict on monopoly capitalism. Progressive taxes, for this sector, seemed to work not only against monopoly, but ultimately for peace. John Dewey, Amos Pichot, and some other created a group called Association for an Equitable Income Tax that proposed 50 percent taxes for all income in excess of one million dollars. This is a higher marginal rate than we have today.
All of this came together in the estate tax bill of 1916, which maintained its status as an excise by emphasizing wealth transfer. And so, too, in some way, Warren’s surtax on wealth will surely be presented, if it ever succeeds in passing Congress, in such a way that it taxes the measure of wealth. This could be done in a number of ways – in particular, by taking apart the tax exemptions that usually make family trusts so sweet.
There are many ways to skin a plutocrat. That is the lesson of tax history.