Key Takeaways
- Debate over a federal tax on wealth is picking up towards the midterm elections.
- Many believe such a tax could be struck down as unconstitutional.
- Legal doubts also loom over similar taxes, such as a tax on unrealized capital gains.
- Hazy year-end period for Congress could gain clarity after elections.
- Overtime deduction used disproportionately in U.S. territories.
As the midterm elections approach, the concept of wealth taxation has become more and more prominent.
Californians will soon vote on the proposed one-time 5 percent tax on fortunes of $1 billion or more—a levy supported by many on the left but opposed by Democratic Governor Gavin Newsom. The discussion about the ballot initiative, however, has attracted attention from around the U.S. and the world, adding momentum towards the argument that only a tax on vast accumulations of wealth can tackle economic inequality.
This has, inevitably, led to more discussion about whether a direct tax on wealth or assets could be enacted at the federal level. Even the United Airlines chief executive officer recently weighed in, advocating for a federal wealth tax rather than statewide taxes. But should Democrats gain more power in Washington over the coming years, they may soon be faced with some of the significant hurdles this policy would face. This includes a potential constitutional challenge that could be fatal.
While the U.S. Constitution expressly allows an income tax through the 16th Amendment, it includes other restrictions on the power of Congress to levy taxes. This includes the mandate that any “direct” tax be apportioned by state population, which in practical terms prevents Congress from enacting one. While the term “direct tax” isn’t defined in the constitution, it has normally been interpreted to include a tax on property.
Legal experts vary on how much leeway the constitution allows, and whether there might be ways Congress could work around the restriction. But the issue is sure to loom over any current debate over a federal wealth tax.
This could be true for wealth taxes, as well as other taxes that try to capture some increases in wealth, such as a tax on unrealized capital gains—something Democrats in Congress proposed in 2021 and 2022. But the 2024 Supreme Court decision in Moore v. United States, while upholding the repatriation tax enacted by Congress 2017, has been interpreted as potentially narrowing the definition of an income tax under the 16th Amendment. In particular, some of the Republican-appointed justices supported the idea that income needs to be realized in order to be taxed.
These aren’t the only hurdles to wealth taxation, as they also face questions over administrability and complexity. But if the pressure for Congress to address perceived inequality continues to grow, lawmakers may still look at some of those proposals. But those proposals could face a long road before becoming established, upheld law.
Recent Tax Pieces:
Fate of Near-Term Tax Policy Hinges on Midterm Election Results – Cady Stanton, Tax Notes ($):
The results of the federal elections, as well as the political environment produced after months of campaigning and partisan politicking, will have a direct impact on what tax legislation could move or be stopped in its tracks, according to Jessica L. Jeane of Baker Tilly US LLP.
“We’re going to get a clear picture after the elections as to what really has legislative legs, and what doesn’t,” Jeane said.
Republicans‘ overtime tax break hit biggest in US territories, internal data shows – Brian Faler, Politico:
That wasn’t what Republicans intended when they created the break as part of their 2025 tax cuts in hopes of appealing to working-class voters, especially in the battleground states that returned Trump to the White House in 2024. Nor is it obvious why deductions in the territories were so big.
“It’s hard to come up with a reason why those deductions would be so large,” said Joe Rosenberg, a former top tax official at the Congressional Budget Office who’s now a senior fellow at the Tax Policy Center in Washington.S accepted approximately $977 million in questionable claims for the recently enacted car loan interest deduction, according to an agency watchdog.
Lawmakers Push to Move Film Tax Credit in Lame-Duck Package – Macon Atkinson and Chris Cioffi, Bloomberg Tax ($):
“That’s the kind of backing that moves a provision, and we’ll keep making that case to members and to leadership,” Friedman said in a statement. “Production doesn’t wait for Congress, so we’re pushing to get this done as quickly as possible and taking every opening we can.”
Proponents of the bill say it’s necessary because US film production has been in sharp decline in recent years, while international markets like Ireland and Eastern Europe have attracted more investments due to enticing tax incentives and lower labor costs.
Musk Would Avoid $2 Billion Tax Bill With Trump Account Donation – Chris Cioffi, Bloomberg Tax ($):
Republicans have cheered the move as a way to help boost investing. The strategy Musk and others have used before — donating appreciated stock to a qualified tax-exempt organization to avoid billions in capital gains tax on stock sales, while generating more in charitable deductions — is gaining steam with the ultra wealthy.
But in a moment where mega stock sales are minting new billionaires vowing to donate wealth to charity, those who study tax advantages of philanthropy say the stock donation strategy could become a dominant dodge with the appearance of altruistic wealth redistribution. And though receiving stocks in Trump Accounts could be a good deal for holders of the tax-privileged accounts, there are numerous logistical hurdles to clear before cashing in, tax experts say.
IRS Faces IT, Staffing Hurdles in Fiscal 2027, Watchdog Says – Tyrah Burris, Tax Notes ($):
The agency received approval to hire certain employees for the 2026 filing season, but a new hiring process delayed posting job announcements. As of February, the submission processing function, which processes tax returns, was unable to hire staff for 58 percent of its approved positions, according to the report.
The accounts management function, which handles taxpayer contacts and tax accounts, couldn’t hire for 34 percent of its approved positions, while both functions were unable to onboard and train the employees they hired before the 2026 filing season began.
Public Domain Supervillain of the Week
Every week, a new villain from the Golden Age of comics, who's fallen out of favor.This week's entry: The Pirate.
Debut Year: 1943
Debut Publication: Clue Comics #1
Arch-nemesis: Zippo (see April 22 post)
Evil Plan: Actually more of a labor racketeer than a pirate, he lures workers away from a nearby munitions plant for a cut from its competing company.
Abilities: No superpowers, but he slays any dissenting voices in his organization with his saber.
