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Wealth Taxes Will Remain Impossible — Until They Aren’t

Posted on Dec. 17, 2019

Most Americans like the wealth tax – 63 percent, according to The New York Times. That comfortable majority includes 77 percent of Democrats and more than half of all Republicans.

“Men and women like it,” observed the Times. “So do the young and the old. The proposal receives majority support among every major racial, educational and income group.”

That’s legitimately impressive. But voters are a fickle bunch, especially when it comes to policy preferences. Tax innovations, in particular, have a tendency to get less popular once voters take a closer look. Anyone remember the flat tax?

Even if the wealth tax remains popular, it still faces other problems. While many Democrats running for president like the idea, Democrats serving in Congress seem less enthusiastic. Even if Democrats manage to run the table in November, it’s quite possible that the wealth tax will be a tough sell on Capitol Hill.

The Supreme Court is an even bigger problem. While it’s possible to imagine a wealth tax that passes muster with the Court, it’s still likely that the justices will find a federal tax on wealth to be unconstitutional.

So maybe we should stop talking about this pie-in-the-sky, implausible idea. Maybe we should be looking for simpler, more realistic solutions to the pernicious problem of rising inequality.

Like raising income tax rates on high earners. Or rescuing the estate tax from its near destruction. Or raising the rate on capital gains.

In fact, for progressives interested in raising the overall tax burden on the rich, the right answer might be “all of the above”: Pursue a variety of progressive tax reforms that don’t require passage of a new, untested, and quite possibly unconstitutional revenue device.

But at the same time, keep talking about that new revenue device. Because here’s the lesson that history has to offer modern-day policymakers with a penchant for soaking the rich: Real tax reform takes time. Sometimes a lot of time.

Consider the income tax. It’s been the centerpiece of federal finance for more than 100 years. But it took even longer than that to find a permanent place in the tax system.

The modern federal income tax dates to 1913. But it was already an old idea by the time Woodrow Wilson signed it into law. British lawmakers had enacted an income tax in 1799. In the United States, Treasury Secretary Alexander Dallas suggested one in 1815 (although Congress ignored him). And in 1861, the Union government imposed an income tax to help pay for the Civil War.

The Civil War income tax raised a lot of money. But it also raised a lot of hackles, especially among well-to-do northerners, who championed its repeal after the war ended. Congress let the tax expire in 1872.

However, Americans didn’t stop talking about the income tax just because Congress stopped collecting it. The levy remained a fixture of national political debate throughout the latter decades of the 19th century. Democrats and Populists, in particular, remained keen on using a progressive income tax to help counter the regressive burden of federal tariff duties.

The late-19th-century argument over income taxes was endless, and often quite bitter. Opponents were quick to describe the levy as unwise and even dangerous. “In a republic like ours, where all men are equal, this attempt to array the rich against the poor or the poor against the rich is socialism, communism, devilism," Sen. John Sherman declared.

As it turned out, such critics found support where it mattered: among the justices of the Supreme Court. Congress passed a new income tax in 1894, but the Court invalidated it the following year in its famous Pollock decision. After nearly rising from the dead, the income tax returned to the graveyard of fiscal reform.

Once again, reports of its demise proved to be greatly exaggerated; the tax was only mostly dead, not completely dead. Income taxes remained a lively topic of political debate. Democrats, Republicans, Populists, and Progressives continued to fight about the need for, and viability of, a federal tax on individual and corporate income.

Those arguments yielded fruit in 1909. For 15 years, champions of progressive tax reform had been trying to revive the income tax. Some believed that the Court had simply made a mistake — and might rectify the error if given another chance. Others thought that lawmakers should sidestep the Court by advancing a constitutional amendment to specifically authorize an income tax.

Ultimately, Congress and President William Howard Taft chose to split the difference. In 1909 they enacted an artfully constructed corporate income tax designed to survive constitutional scrutiny. At the same time, they advanced a constitutional amendment to guarantee that income taxes would be immune from constitutional challenge.

Many income tax opponents expected the amendment to fail. But in fact, one state after another opted for ratification, and on February 25, 1913, the 16th Amendment to the Constitution made the world (or at least the American legal system) safe for income taxes. Later that year, Congress enacted legislation that made good on the amendment’s promise, and the income tax has been with us ever since.

Here’s the point of this capsule history: Big tax ideas need a long runway if they are ever going to take off. The income tax was kicking around American politics for more than a century before it became a permanent element of the tax system. For the last 40 years of that century, moreover, debate over the tax was consistent, intense, and sometimes downright bitter.

The income tax was also the subject of a lot of naysaying during its century-long gestation. Critics insisted that it was impossible, implausible, and even un-American. And it arguably was all those things — until it wasn’t.

Of course, not every big tax idea fares as well over time. Americans have also been talking about a broad-based federal consumption tax for more than a century, for instance, and it still doesn’t seem to have much traction.

Long debate, in other words, is no guarantee of eventual success. But it’s probably fair to say that short debate is a guarantee of failure.

So if you like wealth taxes, keep talking about them. All that hot air is important.

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