His 25% minimum tax on asset gains runs into the 16th Amendment.
by The Wall Street Journal Editorial Board, March 10, 2023
One part of President Biden’s budget that deserves more attention is his stealth wealth tax, because it looks unconstitutional. He’s selling it as a 25% “minimum tax” on billionaire incomes, but see the fine print. The tax would apply to “those with wealth of more than $100 million,” while covering “all of their income, including appreciated assets.”
Slight problem: Appreciated assets are not income. The Constitution bans the federal government from imposing “direct taxes,” unless they are apportioned among the states according to population. To get around that, Congress in 1909 passed the 16th Amendment, which for a century has permitted the feds “to lay and collect taxes on incomes.”
What is income, exactly? That question can be trickier than it sounds, since the IRS says income includes fringe benefits, plus “the fair market value of property or services you receive in bartering.” Yet it’s relatively easier to say what income isn’t. If you own a house, or a stock, or a trendy and pricey modernist painting, it isn’t income simply when the market value rises.
In a notable 1920 case, the Supreme Court considered a stockholder who received additional shares as a dividend. “We are brought irresistibly to the conclusion,” said the majority in Eisner v. Macomber, “that neither under the Sixteenth Amendment nor otherwise has Congress power to tax without apportionment a true stock dividend made lawfully and in good faith, or the accumulated profits behind it, as income of the stockholder.”
Later Justices narrowed Eisner in some ways, but the principle is sound, and Mr. Biden wants to go much further by taxing asset appreciation when the owners do nothing at all.