Massachusetts Sen. Elizabeth Warren’s campaign for the Democratic presidential nomination has brought new scrutiny to her signature wealth tax proposal. Critics have called the tax unwise, unconstitutional, and even un-American. While reasonable people can disagree about the first two charges, the last is clearly untrue.
Wealth taxes aren’t unprecedented in America, even at the federal level. Five times over the past 230 years, Congress has imposed a particular form of wealth tax — a tax on real estate (and sometimes slaves). Lawmakers used those taxes to raise revenue in exigent circumstances, especially wartime. But they also defended them in broader terms of fairness and progressivity.
Wealth vs. Property
Wealth taxes and real property taxes aren’t exactly the same thing; as Kyle Pomerleau has pointed out for the Tax Foundation, the latter is just one version of the former — and a narrow one at that. Still, wealth taxes and real property taxes have a lot in common. Both tend to be framed in similar political terms, with a heavy emphasis on progressivity. Perhaps even more important, at least federally, is that both raise similar questions about the Constitution’s requirement that direct taxes be apportioned by population.
On the stump, Warren has been keen to emphasize the family resemblance between her novel wealth tax on the rich and the more familiar property taxes paid by homeowners around the nation. “How many people here own a home?” she asked one audience back in April. “You’ve been paying a wealth tax for years. They just call it a property tax. I just want their tax to include the diamonds, the yachts, and the Rembrandts.”
Federal Property Taxes
In the United States, property taxes have generally been associated with local, and sometimes state, governments. But since the nation’s founding, every level of government has imposed property taxes at one time or another. During the 19th century, moreover, many jurisdictions even tried to collect a broad version of the property tax, including both real and personal property in the tax base.
Compared with their state and local colleagues, federal lawmakers have been skittish about using property taxes. By and large, their reluctance seems to have stemmed from the Constitution’s requirement that direct taxes be apportioned among the states on the basis of population. Apportionment seems to make federal property taxes untenable, because it results in unequal tax burdens across states; under an apportioned property tax, rates would tend to be higher in poorer states than in richer ones — sometimes prohibitively so.
Scholars disagree about the relevance of the apportionment clause for Warren’s wealth tax. (See, for example, the recent exchange between law professors Calvin H. Johnson and Erik M. Jensen in the ABA Tax Times.) But the history of federal wealth taxes, and specifically a federal property tax, suggests that apportionment didn’t always strike lawmakers as an insurmountable obstacle. Indeed, for reasons of both practicality and fairness, they tried repeatedly to tax accumulated wealth.
1798
Near the end of the 18th century, the young United States found itself on the brink of war with an erstwhile ally. Tensions with France came to a head in 1798, and federal officials began preparing for armed conflict. As part of that preparation, they imposed a range of new taxes, including the nation’s first national property tax.
The direct tax of 1798 was designed to raise $2 million through an apportioned tax on real estate (including both land and structures), as well as slaves. As required by the Constitution’s infamous three-fifths clause, those same slaves were partially counted for apportionment purposes.
The law taxed dwellings worth more than $100 using progressive rates that ranged from 0.2 percent to 1 percent of total value. Slave owners were also required to pay 50 cents for each healthy slave between the ages of 12 and 50. Finally, the law taxed “land” (a category that also included dwellings worth less than $100) at a variable, state-specific rate. As historian Judith Green Watson has explained, the land tax was treated as a residual. “Each state’s land tax rate was computed separately, as a residual after the amount of tax derived from the first two categories was subtracted from the quota,” she wrote in an article for the National Archives website.
Supporters of the 1798 direct tax stressed the fairness of its progressive housing levy. They applauded its tendency to burden rich city dwellers, with their expensive urban houses, rather than rural residents with far simpler residences. In her landmark 2006 study of taxation in the early republic, American Taxation, American Slavery, historian Robin L. Einhorn quotes a happy lawmaker from a rural district. “The riches of the country lie in the cities, and the taxes ought, therefore, principally to fall there,” declared Rep. John Williams, a Federalist from New York.
The 1798 direct tax, along with other levies imposed by the Federalist-led government, wasn’t exactly a rousing success. “The measures raised little revenue and, even in their progressive form, contributed to Federalist political defeats in 1798 and 1800,” observed W. Elliot Brownlee in his 1996 book, Federal Taxation in America: A Short History. When Thomas Jefferson won the presidential election of 1800, he and his colleagues in the Democratic-Republican Party moved quickly to eliminate all internal revenue taxes, including the direct tax.
War of 1812
Congress revived direct taxes in 1813 under the stress of an actual war, this time with Great Britain. The property tax enacted that year operated in much the same fashion as the 1798 levy, taxing land, dwellings, and slaves (although it dispensed with the odd residual calculation of the land component). The levy was designed to raise $3 million.
In a departure from precedent, the 1813 law allowed state governments to assume responsibility for the taxes allotted to their residents, in exchange for securing a discount on the apportioned total. Seven states opted for that arrangement, while 11 were content to let federal tax collectors administer the levy directly.
Congress passed additional federal property tax laws in 1815 and 1816. They were intended to raise $6 million and $3 million, respectively. Four states assumed responsibility for the quotas apportioned to their residents; 14 let the feds do the dirty work.
The direct taxes enacted during the War of 1812 were generally well tolerated during the conflict. But they disappeared when the fighting stopped, further reinforcing the idea that direct taxes were an extraordinary revenue tool — suitable for exigent circumstances but not for routine use.
Civil War
The last federal experiment with a direct, apportioned tax on personal property came in 1861. Once again, a war proved to be the catalyst for fiscal innovation. In the face of sagging tariff revenue and soaring military expenditures, the Union’s Treasury secretary, Salmon P. Chase, asked Congress for a direct property tax on land and dwellings. Lawmakers closely patterned the law on the direct taxes imposed between 1813 and 1816, although they chose not to tax slaves, whether owned by citizens of the Union or the rebellious states.
The decision about taxing slaves underscores an important point about the 1861 levy. Congress imposed the tax not simply on the loyal states of the Union, but also on the states that had seceded to form the Confederacy. This decision would create serious problems for the direct tax, both during the war and afterward. As might seem predictable, federal tax collectors encountered enormous difficulties in making the tax function properly, even after the Union victory.
During congressional debate over the 1861 tax, many lawmakers voiced an interest in taxing other forms of property beyond land and houses. In particular, they were interested in taxing intangible forms of personal property, like stocks, bonds, and cash. To restrict the property tax to real estate would be to work a grave injustice on farmers, complained lawmakers from predominantly rural districts. “I cannot go home and tell my constituents that I voted for a bill that would allow a man, a millionaire, who has put his entire property into stock, to be exempt from taxation, while a farmer who lives by his side must pay a tax,” declared Rep. Schuyler Colfax of Indiana.
Ultimately, Congress addressed those fairness concerns not by expanding the base of the new direct tax, but by adding a separate income tax to the revenue system. And as it happened, that new levy on income quickly eclipsed the property tax; while the latter was imposed only for a single year, the former remained on the books throughout the Civil War and even survived for seven years after it ended.
Lawmakers proved cool to the direct tax for several reasons, including the perceived unfairness of burdening land-rich farmers over intangible-rich city dwellers. But Congress was also impressed by the inequity flowing from the apportionment requirement; the increased concentration of wealth in states with large manufacturing and commercial enterprises made apportionment by population increasingly untenable. As economist Charles Dunbar wrote in 1889: “Only the smallness of the sum to be raised made a special assessment upon one species of property tolerable, in a country where personal property had multiplied so greatly.”
After the war, the case against the direct tax only grew stronger. Efforts to collect it in the states of the former Confederacy were haphazard, inequitable, and broadly unsuccessful. Indeed, the difficulties were so serious — and hard to correct — that a large portion of the total due from the Southern states was still outstanding some three decades after the war’s end. Ultimately, Congress simply stopped trying; in 1891 lawmakers forgave all unpaid sums and refunded to the states all money collected to that point.
Any Lessons?
The myriad problems associated with the direct tax of 1861 seemed to discredit the tax, even among those who had once supported it. Indeed, analysts of the late 19th century were all but certain that direct taxes would never again be part of the federal revenue system. “The direct tax provided for by the Constitution has at last been effectually discredited as a source of revenue,” Dunbar wrote. “It has also been too prolific of misconception and confusion to have any interest henceforth as a practical measure of finance.”
As it turned out, Dunbar was right. Congress has never since exercised its constitutional power to impose a direct property tax.
The constitutional requirement that such a tax be apportioned is certainly a big part of the reason why lawmakers have avoided property taxes for the last 158 years. If the unequal distribution of wealth among the states was a serious issue in 1861, it’s at least as big a problem today.
That said, many of the most pernicious problems associated with the 1861 levy were specific to the circumstances of its enactment — namely, the attempt to levy a tax on rebellious states and then collect it after the war. Those difficulties, both serious and ultimately impossible to resolve, were probably the most powerful reason that Congress avoided new direct taxes, at least for many decades after the end of the Civil War.
Supporters of modern wealth tax proposals still must wrestle with the Constitution’s awkward (and quite possibly deliberately so) apportionment requirement. Critics have a plausible case when they suggest that a wealth tax may be unworkable, depending on how the Supreme Court ultimately views such a levy.
But one hurdle that wealth tax supporters shouldn’t have to clear is any suggestion that the tax is inherently inconsistent with American ideals or fiscal practices. The country has a long history of trying to tax accumulated wealth — just not a recent one.