2021 NYU Tax Policy Colloquium Week 1: Brooks and Gamage on drafting a constitutional wealth tax, Part 2

 My prior post discussed the apportionment issues in the very interesting Brooks-Gamage paper that we discussed at the NYU Tax Policy Colloquium this past Tuesday. Herewith “everything else”- or rather, a few comments on just some of the many issues discussed elsewhere in the paper.

2.  SOME ISSUES DISCUSSED IN THE PAPER OTHER THAN APPORTIONMENT

What I will do here is simply summarize several of the main arguments in the paper, and then offer brief response to them.

1) The paper’s “Indirect Tax Canon” – The main route that Pollock found to invalidating the US federal income tax as a “direct tax,” in violation of the Constitution’s requirement that direct taxes be apportioned between the states, went something like this? A property tax (or at least a real property tax) is widely agreed to be an example of a direct tax. Taxing the income from property is tantamount to taxing the property itself. Hence, an income tax that includes the income from property is really just a property tax, at least in sufficient part to allow 1895’s 5 right-wing ideologues (who were 5 in number) to strike the whole thing down.

The paper agrees with the 5 right-wingers from 1895 that there is an equivalence here. Modern scholarship has similarly talked a lot about the similarity between an income tax and a wealth tax, in terms such as the following: Say I have $100 of wealth that earns $5/year. A 20% income tax on the $5 annual flow, and a 1% wealth tax on the value that reflects the present value of all expected annual flows, not only raise $1/year each (at least, under the stated facts), but are simply very similar and to a degree interchangeable.

But here’s the problem: If A is the same as B, then B is also the same as A. Is any seemingly indirect tax that could be stated as a direct tax thereby forbidden without apportionment? What about the fact that, equivalently, the direct tax version could be restated as an indirect tax? Why must everything that MIGHT be put in the form of a direct tax therefore qualify as such, rather than going the other way around (which is far more supportable based on pre-Pollock precedent)? The paper therefore sets forth the Indirect Tax Canon, which holds that, whenever Congress reasonably characterizes a tax as indirect, it should be so construed, even if one could also have stated it as a direct tax. They argue that (i) the pre- and post-Pollock precedents, (ii) the apparent original purpose of the apportionment clause and the Framers’ broader intention regarding empowerment of the federal tax authorities, and (iii) common sense and workability all support the proposed canon.

Comment: This makes sense to me. But I believe that the current Supreme Court has shown signs of following what I would dub the “Modified Direct Tax Canon.” This holds that, whenever a tax could be formally stated as either direct or indirect, they will choose whichever characterization permits them to get the policy result they want.

The PPL case from 2013 arguably foreshadows this approach. In that case, the Supreme Court determined that a UK tax was an income tax, rather than a wealth tax, and hence could qualify for foreign tax credits when paid by US multinationals. There were dueling amicus briefs by reputable academics, both pro and con creditability, and both sides noted that the UK tax could equivalently be stated and  thought of as either one. Each then gave nuanced rationales for following one characterization rather than the other.

For Justice Thomas on behalf of the Court, this was a super-easy case. Because it COULD be an income tax (this being one of the two equivalent forms), it WAS an income tax. Why? Apparently because Justice Thomas hated the UK “Labour Government” that had enacted  the tax. I have never seen any other US court case in which the political party of a foreign government that happened to have enacted a law raising US legal issues has been so emphasized, for absolutely no discernible reason behind unstated personal animus.

The funny thing about it is that Thomas didn’t hurt the Labour Government by upholding creditability. Indeed, surely it was good for them because it meant the US Treasury, rather than companies that might have ongoing business in the UK, would be bearing the tax to the extent that credits were available. But he wasn’t trying to hurt the Labour Government – he was trying to express contempt for them.

I view PPL, not as precedent here, but as evidence that right wingers on the Supreme Court will use the equivalence of direct and indirect taxes in order to make sure that they can always get the result they like.

2. Pollock was a rogue case, that did not merit respect and has not received it. In addition to being clearly wrong based on prior precedent, when it was decided, it was poorly reasoned, reflected clear political bias rather than proper judicial behavior, and was confused and incoherent. I should note, the paper doesn’t so much lay all this out in detail, as it has other fish to fry, as offer some supportive evidence and allow one to infer the rest.

Comment: I’ll just add one thing here: a quotation from it that shows what sort of exercise it was. Here goes: “The present assault upon capital is but the beginning. It will be but the stepping stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich – a war constantly growing in intensity and bitterness. If the court sanctions … [this tax], it will mark the hour when the sure decadence of our present government will commence.”

All this for a 2%tax on income above a given threshold! 

Let me rephrase the Court’s argument: “HELP! The commies are coming! The commies are coming!” This sort of rabid (and as it proved empirically false), nakedly political, exercise does not make for a precedent that one should be eager to respect.

3) Pollock has subsequently been substantially overruled, not just by subsequent cases but also bt the 16th Amendment, which authorized the income tax.

Comment: I don’t have the time or space here to address this very interesting set of arguments, but a point that other tax law scholars should notice and think about pertains to the paper’s view of the famous words in the 16th Amendment – income “from whatever source derived” – as not just allowing income to be defined broadly, but also as very specifically rebutting the line of argument that Pollock used to say that a tax on property income is really a property tax – because the income is “derived” from the property, hence making it a direct tax even if it initially seems to be indirect.

Although there is lots more, I think I will stop here. But a final note I will add is that, if my pessimism about the current Supreme Court is justified – if they are as lawless, willful, and politically / ideologically driven, at the expense of honest legal reasoning, as I believe – this has implications for how folks on the other side from the Court should go about things.

The rule of law is an instrument for opposing sides agreeing to regulate their political competition by agreeing to some basic rules of the game, to mutual advantage if both sufficiently comply. Even if it has always been true that both liberal and conservative justices tend to come out in favor of their own views a surprisingly high percentage of the time, when they are committed to reasonably honest and good faith legal reasoning – an aspect of the rule of law there is both a selfish detriment and a selfish benefit. The selfish detriment is that you accept that sometimes you won’t be able to get the result you want, because the legal reasoning exercise couldn’t reasonably get you there. The selfish benefit is that sometimes this same constraint applies to the folks on the other side. Both sides may benefit overall from the mutual constraint, which adds to predictability, limits gyrations, etcetera.

If both sides were doing this in secret, this would be a prisoner’s dilemma. But since they can to a degree observe each other (ex post rationalizations notwithstanding), they can work their way to a decent equilibrium in which methods such as tit-for-tat, or the loss of respect from more neutral third-party observers, supply the motivation to act at least moderately honestly and honorably.

But what if one side simply rejects any notion of limiting themselves by plausible and good faith legal reasoning? The other side really just cannot keep on playing the same old game if they are the only ones still honoring it. That leads straight to systematic exploitation of the good actors by the bad ones. It’s not sustainable if the bad actors are set in their ways.

Welcome to the United States in 2021.