This article was first published on Aug. 2, 2024 in “Law & Liberty.”
The idea of a federal wealth tax recently has become a popular cause among “progressives.” The question arises, however, of whether such a tax would be constitutional.
In theory, a federal wealth tax could pass constitutional muster. But unless it qualified under the Constitution as an “indirect tax” rather than as a “direct” one, its projected revenue would have to be allocated (“apportioned”) among the states according to their respective populations. The apportionment rule likely would render such a levy impractical.
Many wealth tax advocates contend, therefore, that wealth taxes qualify as “indirect.” But this contention seems plausible only because most Supreme Court pronouncements on direct and indirect taxes have been conflicting, uncertain—and wrong.
The confusion at SCOTUS can be traced to Hylton v. United States (1796), where Justice Samuel Chase suggested in dictum that direct taxes were limited to capitations (head or “poll” taxes) and land levies. With the exception of the correct holding that income taxes are direct (1895), the confusion continued in the nineteenth century and has carried forward into modern times. In 1937, the Supreme Court held that an imposition on wages was an “excise” and therefore indirect, and in 2012 the court ruled that a penalty for not purchasing health insurance was an indirect tax.
Most recently, in a concurring opinion in the June, 2024 case of Moore v. United States, Justice Ketanji Brown Jackson relied on the dictum by Justice Chase to suggest that direct taxes were limited to capitations and land levies. By contrast, Justice Brett Kavanaugh’s opinion for the court defined a direct tax as one imposed on persons and property and an indirect levy as one imposed on activities and transactions. He therefore categorized the income tax as “indirect.”
As explained below, the founding-era record shows that all of these statements are inaccurate.
In defense of the justices, it must be said that legal commentary has been little help. On this issue, as on so many others, it has been plagued by two maladies common to productions from the law school professorate. That is, it has been both agenda-driven and poorly researched.
Thus, the uncertainty persists even though the future Chief Justice John Marshall—surely a credible source—testified at the Virginia ratifying convention that the definition of direct taxes was then “well understood.”
The Weakness of the Chase Dictum
Justice Chase’s suggestion that direct taxes were limited to capitations and land levies took the following form:
“I am inclined to think, but of this I do not give a judicial opinion, that the direct taxes contemplated by the Constitution, are only two, to wit, a capitation, or poll tax, simply, without regard to property, profession, or any other circumstance; and a tax on LAND. I doubt whether a tax, by a general assessment of personal property, within the United States, is included within the term direct tax.”
I am uncertain why judges and commentators have treated this statement as authoritative. By its very words, it is tentative (“I am inclined to think, but of this I do not give a judicial opinion”). And it is inaccurate: First, at the time Justice Chase wrote this, his own state of Maryland imposed direct taxes on personal as well as real property. Second, capitations were not necessarily imposed “without regard to property, profession, or any other circumstance.” They were regularly (although not invariably) scaled to account for the income, status, sex, age, and other conditions of the person taxed.
A wealth of evidence from the 1787-90 constitutional debates tells us without question that “a general assessment of personal property” was a direct tax. Among those listing personal property as subject to direct taxes were Federalists John Marshall (the future Chief Justice) and Oliver Ellsworth (another future Chief Justice) as well as Antifederalists Patrick Henry, North Carolina ratifier Samuel Spencer, the dissenting minority at the Pennsylvania ratifying convention, the author of the New York “Brutus” essays, and William Paca from Chase’s own state of Maryland.
Unfortunately, justices and commentators alike seem to have overlooked most of these references.
Founding-Era Tax Vocabulary
The misunderstanding has been exacerbated by a failure to learn eighteenth-century tax vocabulary and to read contemporaneous tax laws.
The vocabulary was fairly straightforward. An “excise” was a levy on the consumption of domestically sold goods, usually, but not always, at the point of sale. Excises often were targeted at luxuries (such as carriages) and vices (such as alcohol). A “custom” was a tax on imports or exports. An “impost” was an import custom. “Tonnage” was a custom imposed on the cargo of ships. All of these were considered indirect taxes. Indirect taxes generically were called “duties.”
Indirect taxes often discouraged vice and conspicuous consumption. But direct taxes burdened productivity and thrift—and, in the case of the capitation—life itself.
There were duties outside the category of excises and customs as well: impositions on consumption of services, on transit, and certain other transactions, such as the issuance of legal papers.
Typically, an indirect tax was imposed by a law limited to that purpose: an excise law, a stamp act, and so forth. That law might be time-limited.
By contrast, direct taxes typically were imposed by permanent statutes that looked superficially like modern real property tax laws. Revenue usually was apportioned among political subdivisions. Thus, tradition, not slavery (as sometimes suggested), was the origin of the Constitution’s requirement that direct taxes be apportioned among the states.
Modern confusion over definitions may derive in part from the founding-era use of the term “land tax.” In 1692, the British Parliament adopted an omnibus direct-tax measure to replace feudal dues and other prior revenue sources. This was called the “Land-Tax Law.” This title was a misnomer, because the measure levied on far more than land. Here is the description in the 1778 edition of Ephraim Chambers’ Cyclopaedia:
“. . . from the year 1693 to the present, the land-tax has continued an annual charge upon the subject . . . The method of raising it is by charging a particular sum upon each county, according to the valuation of 1692; and this sum is assessed and raised upon the personal as well as the real estates of individuals . . . the assessment on personal estates shall be 4 s. [i.e., four shillings] in the pound, according to the true yearly value of them; i.e., for every 100l. [i.e., £100] of ready money and debts, and for every 100l. worth of goods, 20 s. . . . and excepting stock upon lands and household stuff, and debts and loans owing to his majesty. Every person having a public office or employment, and their substitutes, shall pay 4 s. for every 20 s. of their salaries . . . Every person having an annuity or pension out of the exchequer, or out of any branch of the revenue shall pay 4 s. for every 20 s. except salaries charged upon lands which pay to the full, and annuities exempted by act of parliament . . . .”
Thus, the “land tax” covered not merely real estate, but cash, accounts receivable, other personal property, and income. The provision taxing rental income added a withholding requirement: “The land-tax shall be paid by the tenant, who shall deduct it out of his rent.”
American Direct Tax Statutes
Most of the North American British colonies adopted direct tax statutes modeled loosely on the British Land Tax Law, and a few retained the law’s misleading title. After 1776, the newly-independent states retained and refined their revenue structures. Maryland, Justice Chase’s home state, represented a variation on the theme. Before Independence, Maryland relied largely on capitations. It was only after independence that Maryland switched to direct taxes on real property, personal property, and a rough estimation of income.
All founding-era state direct tax statutes that I have found covered both real and personal property, but most were even more comprehensive. A 1780 Massachusetts statute included polls and real estate within its base and then added:
“And also . . . money at interest more than they pay interest . . . monies of all kinds in hand, and also the amount of the just value of all goods, wares and merchandize, stock in trade, vessels of all sorts, with their stores, appurtenances and appendages, plate, horses, oxen and cattle of all sorts and ages, sheep, swine and grain of all sorts, and all kind of produce of the land, and all other property whatsoever, excepting household furniture, wearing apparel, farming utensils, and the tools of mechanicks . . . And on the amount of their income from any profession, faculty, handicraft, trade or employment; and also on the amount of all incomes and profits gained by trading by sea and on shore.”
The Pennsylvania direct tax statute, in addition to assessing a wide range of real and personal property, included “all offices and posts of profit” (i.e., an income tax) and “all professions, trades and occupations.” The latter commonly was called a “faculty tax.” Generally the assessment of a “faculty” was based wholly or partly on business profits, so it also amounted to an income or business profits levy. The structure of the Pennsylvania scheme explains why some of its ratification convention delegates described direct taxes as exactions on “land, cattle, trades, occupations, etc.”
Other American founding-era direct tax statutes (that is, in addition to those from Massachusetts, Pennsylvania, and Maryland) were adopted by Connecticut, New Hampshire, New York, and South Carolina.
During the 1787-1790 constitutional debates, the Constitution’s grant to Congress of power to impose direct taxes—even though hampered by the apportionment requirement—proved highly controversial. Five state ratifying conventions offered proposed amendments to abolish or limit the power. The Constitution’s defenders justified it as necessary during periods of war, but assured voters that in normal times, the federal government would rely only on indirect levies.
There were several reasons why direct taxes were unpopular. Some believed they discriminated against landowners and the poor, who might not have the ready money required to make regular payments. Some thought that direct taxation was unavoidable, but one could avoid indirect taxes by shunning the item taxed.
The founders’ values also explain why indirect levies were more popular than direct ones. Indirect taxes often discouraged vice and conspicuous consumption. But direct taxes burdened productivity and thrift—and, in the case of the capitation—life itself.
The Constitution’s favoritism of indirect taxes reflects in part a moral choice. One reason a constitutional wealth tax would be difficult to craft is that by adopting the Constitution, the American people endorsed the same virtues that advocates of wealth taxes now wish to punish.
