Why the Wealth Tax is Complicated (And a Bad Idea)

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I'm going to delve into a very, very boring topic and I'm going to try to make it interesting, educational and titillating so you don't fall asleep. We need to talk about tax law.

I took tax law when I was in law school and was very good at it. Two of my highest grades in law school were classes on income tax and estate tax. I did great in property, con law, decedent estates and trusts, income tax, estate tax, and then all of Section 9 uniform commercial code stuff. Man, I love the transactional side of law. I was good at that stuff but I hated torts and criminal law. The worst grade I got in law school was criminal law.

The Democrats in Congress want a wealth tax. They want the ability to tax your wealth. Now, a lot of people have reached out to me and said, "Well, how does this fit under the 16th Amendment?" Because the 16th amendment allows an income tax, but it's a little more complicated than that because the 16th Amendment doesn't actually govern tax law in the United States. The 1st Article of the Constitution does.

Article 1, Section 8 of the Constitution, clause one is Congress has the power to levy taxes and lay duties on exports, imports, and the like. But then there's Article 1, Section 9 of the Constitution that bars a direct tax, a capitation or direct tax, unless the tax is levied in direct proportion to the number of people who live in each state. Now, you should know that that the Supreme Court has ruled that an income tax is unconstitutional, that's why the 16th Amendment had to come about. But there were times in the country there was no income tax.

Now, we’ve got to go to the way back machine to 200 BC. Yes, 200 years before the birth of Christ to this place called the Republic of Rome. The Republic of Rome was governed by a Senate. The Senate knew that it could be slow to decide things. When there were crises, the Senate would appoint dictators and they would give those dictators plenary power to do everything necessary for the defense of Rome, and when the crisis ended, the powers of the dictator were surrendered back to the Senate. But the Senate knew that when there's a crisis, you've got to have one person who can take over and you've got to have that one person able to call the shots.

Rome had a history of very famous dictators. One of the most famous dictators of Rome was Sulla. They got rid of the dictatorship for a while in Rome. Then in 82 BC, Sulla came to power. Sulla knew that there had to be problems because the Roman Senate was having all sorts of issues. There was corruption and the rule of law was breaking down. So Sulla, a very popular general, largely seized power and restructured the Roman Constitution.

He expanded the size of the Senate. He added a bunch of supporters. He placed limits on the powers of other groups. He limited the veto. He forbade ex-tribunes from holding the higher powers. Then in 81 BC, he walked away. His dictatorial powers were given again in 49 BC to someone you might have heard of, his name is Julius Caesar. Cesar was ultimately in 44 BC named dictator in perpetuity for reforming the Constitution and given the power to just handpick people. The American Founders were fascinated by the Roman Republicans. That's why they call us a republic, not a democracy.

Now, this gets me in trouble with certain nitpicky listeners of a certain breed and age, but the Greeks had the word democracy, the Romans had the word republic. They were essentially the same thing. There were differences in their variations as to how they operated. In Greece, it was very much a direct democracy. In Rome, it was a representative democracy. The Founders were more fixated with Rome and Western civilization out of Rome and they went with a representative democracy instead of a direct democracy and they went with a republic. They called it a republic instead of a democracy but they were largely the same thing.

But when I make this point people will call in and yell, "We're a republic, not a democracy!!" Yes, but you're quibbling tomato, tomato. They actually are largely the same thing. They operated slightly differently. The Founders went with the republic because they were high on the Latins and Rome.

One of the fixations they had with the Roman Republic was the dictator. Now, they didn't want a dictator here. In fact, George Washington could have been king and he didn't want it. So what they did is they made Article 1 and the legislative branch the most powerful. It's not a coincidence that the legislative is Article 1 because they're supposed to be the most powerful. Article 2 is the president. He's supposed to be the second most powerful. Article 3, the courts, they were supposed to be the innocuous power.

But the Founders embraced the idea of the way the Roman dictator would work. The president in times of war, as Commander in Chief, would become the most powerful man alive. There's this scene in the movie Lincoln where Lincoln is surrounded by his cabinet ministers and essentially says to them that he has summoned the greatest powers of Western civilization embodied within his office able to be used by him in times of war and he intended to use them. He was right. It comes from the idea of the dictator.

In times of war, the Supreme Court said things that otherwise wouldn't apply. So in times of war, Congress could impose an income tax. It's not true to say an income tax never existed in American history until the 16th Amendment. In a number of wars, including the Civil War and the Spanish-American War, Congress imposed an income tax. But the income tax only lasted as long as there was a declaration of war. The moment the war was over, the power went away as did the president's powers. The moment a declaration of war went away, the president's powers disappeared. That's the way it was designed. It was based on the dictator of Rome.

The Congress when the country was founded wanted to be very careful about taxation. After all, our nation was founded because of a tax rebellion over tea. So they did not want direct taxes. Have you ever asked yourself how come the federal government in their zeal to tax everything doesn't tax property? States have property taxes. Local communities have property taxes. Why isn't the federal government started doing that? Because the Constitution prohibits a property tax. It's a direct tax.

Now, what per se is a direct tax? A direct tax is a tax on a fixed object. So you cannot have a tax on a slave prior to the Civil War because it would be a direct tax. It would be a tax on an object, on a person. You can't have a poll tax because that's a tax on you as an individual going to vote. You could not have an income tax because it could not be levied in proportion to the people. In 1895, there's this case, Pollock versus Farmers' Loan and Trust Company. It was a tax case.

This was a bill filed by Charles Pollock of Massachusetts on behalf of himself and other shareholders against the Farmers' Loan and Trust Company, a corporation of New York and its directors alleging the capital stock of the corporation consists of a million dollars divided into 40,000 shares on a par value of $25. The company was authorized to invest its assets in public stocks and bonds of the United State and they were taxed. They were taxed on the money coming in.

The Supreme Court said, "You can't tax that. You can't tax income." A tax on the rents or income of real estate is a direct tax. It's prohibited by the Constitution. A tax on income derived from the interest of bonds issued by governmental bonds tends to be tax-free. This case from 1895 stated you can't tax income from the interest of bonds issued by a municipal corporation. It's a tax on the power of the state and the instrumentalities to borrow money. It's repugnant to the Constitution. Those are the words from the case.

Here's the other thing. You can't tax assets. This is where the Democrats are headed and why even Elizabeth Warren today is walking away from a tax on unrealized capital gains. Everybody forgot about the Pollock case from 1895. You can't tax assets. The federal government can't. States can because there's not a restriction on the states. This is a restriction on Congress. Congress cannot tax your property because it is an asset. Congress cannot tax your house because it is property. Congress cannot tax your portfolio.

Now, Congress can tax the income. So if you sell it and you get money from it and you've made a profit, Congress can tax that because that's income under the definition of this 1895 case. So the idea that Congress is going to tax your unrealized gains is simply unconstitutional. Not only would it be unconstitutional, though, but it would also wreak havoc on the economy because it would force the billionaires to sell their stock. It would force the billionaires to do this.

The other thing they want to do is place a minimum tax on corporations. That's probably not going to work either. Do you know why American corporations don't pay taxes? The left would have you believe it's because they're hiding their money. The left would have you believe it's because they're putting stuff offshore. To some degree they do, but you know by and large why, it's because companies like Apple have converted everything to clean new energy and they've deducted the cost of doing that. It's what Congress wants them to do.

Other companies have made investments in worker education and so they deduct those costs. It's what Congress wants them to do. So if you force a minimum 15% tax on their profits, the companies are going to stop doing those things. The reason companies don't pay taxes in this country is not because they're hiding money. It's because Congress has given them a bunch of deductions and credits to do things that otherwise taxpayers would have to do and the companies do it and it's a good thing they do.

The left forgets all of that. The left, of course, forgets the Constitution. In 1895, the United States Supreme Court said the federal government cannot tax your property and your assets. They cannot tax your income. It forced a Constitutional amendment, and in the great debate of the Constitutional amendment on the income tax, some argued that they should be able to tax property and assets and that should be included. In the debate over the 16th Amendment, two-thirds of Congress said no, only income, not assets, not property, not real property.

Thus to this day, Congress cannot impose a property tax on you, which means they cannot tax your assets, which means they cannot tax the unrealized gains of your assets even as they're trying to come up with a way to apply a real tax to that imaginary money called your unrealized gains. The Democrats want to tax everything. Thank God for the Constitution.