Blogger of the Week: Isaac William Martin
University of California, San Diego
Thomas Piketty’s Capital in the 21st Century made headlines around the world with its bold proposal for a progressive tax on net wealth. It’s an idea with a distinguished pedigree; Thomas Paine, for one, proposed a similar tax, for very similar reasons, more than 200 years ago. So why doesn’t the United States have a progressive wealth tax already?
The short answer is the Constitution.
The so-called direct tax clause, in Article I, Section 9, states that “No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.” At the time this was written, no one knew exactly what a “direct tax” meant, but everyone was pretty sure that it included taxes on wealth. Southern delegates hoped this clause would prevent northern Congresspeople from abolishing slavery by taxing it out of existence. It created an enduring barrier to any federal tax on income or wealth.
That left the taxation of wealth in the hands of state and local officials. Many state and local governments tried to tax wealth by means of so-called general property taxes. But people didn’t report their assets honestly to the government. Most of the property tax burden ended up falling on owners of real estate, because land and buildings were the only forms of property that couldn’t easily be denied, hidden, or carried over county lines when the tax assessor came calling. Most state and local governments eventually gave up on trying to tax financial wealth. Property taxes today are mainly taxes on real estate.
State constitutions created additional barriers to any progressive tax on wealth. After Reconstruction, some white legislators in southern states came up with the idea of a constitutional limit on the rate of property tax in order to prevent newly enfranchised black voters from increasing taxes to pay for public education. Dozens of other states copied these tax limitations and began to impose more and more restrictive constitutional limits of their own on the powers of local government to tax property. Most states today impose a cap on how much the local property tax can increase from one year to the next. That makes it hard to do anything about growing inequality.
These constitutional provisions show how the heavy hand of history weighs on contemporary public policy. Both the direct tax clause and the device of constitutional property tax limitation were invented to prevent black people from exercising the rights of citizens. They failed. Today no one would argue for a tax policy on those grounds. But these constitutional provisions remain in place anyway. Property owners have found other reasons to like them, and constitutions are hard to change.
American policy makers who wanted to tax capital found creative ways around these constitutional barriers. They amended the federal constitution to permit taxes on income from capital, instead of taxing the value of capital directly. They wrote estate taxes to apply to the transfer of wealth, instead of taxing the stock of wealth. They taxed the fact of owning real estate—$100 per parcel, say—instead of the value of the property. These workarounds aren’t all bad. But they do nothing to prevent extremes of wealth inequality. By the standards of Thomas Piketty and Thomas Paine, these workarounds don’t get the job done.
Can we do more? Implementing Piketty’s plan at the federal level would require a constitutional amendment or a really friendly Supreme Court. That is too much to hope for in the near term. If you want to tax net wealth directly in the United States, your best bet is to campaign for reforms to state and local property taxes.
Isaac William Martin is professor of sociology and a faculty member in urban studies and planning at the University of California – San Diego. He is currently a visiting scholar at the École des Hautes Études en Sciences Sociales in Paris. His last two books are Foreclosed America (with Christopher Niedt, 2015) and Rich People’s Movements (2013).
