Biden’s Proposed Wealth Tax

Only time will tell if a wealth tax is constitutional.

A new budget proposal from President Biden includes a kind of wealth tax. There’s no need for alarm: it would apply only to taxpayers with more than $100 million in wealth. Besides, there is zero chance Congress will actually pass a budget that includes this provision. It’s there as a way to provoke debate on disparities in wealth and fairness in taxation.

You won’t have trouble guessing which side the Wall Street Journal takes in this debate. The editors believe we are already “soaking the rich.” Their critique of Biden’s wealth tax proposal hinges on language in the 16th amendment authorizing the federal government “to lay and collect taxes on incomes.” It isn’t income, they say, when the market value of your stocks or other assets rises.

Presumably they are aware that an increase in wealth plainly is income according to a definition long used by economists (consumption plus change in net worth). Yet they are saying it isn’t the kind of income that can be taxed under the 16th amendment. For support they rely on a 1920 case, Eisner v. Macomber. (I’m sobered to realize this case, now more than a century in the past, was only 58 years old when I first studied it.)

In Macomber the Supreme Court found that a stock dividend was not income within the meaning of the 16th amendment. Mrs. Macomber held 2200 shares of Standard Oil stock, and her holdings increased to 3300 when the company declared a 50% stock dividend. This event did not put any cash in Mrs. Macomber’s pocket. Nor did it increase her wealth in any way. It merely divided that wealth among a larger number of shares. The transaction had no more economic significance to her than if she exchanged a quarter for two dimes and a nickel.

The holding in Macomber would not apply to Biden’s proposed wealth tax. The crux of the case was that the stock dividend did not alter Mrs. Macomber’s wealth. This would not be true of Biden’s proposed wealth tax. Would such a tax survive a constitutional challenge? The answer to that question is likely many years in the future.