Another Perspective

The ‘Max Tax’ Amendment to the Constitution

Advocates of genuine fairness would have it no other way.

By 12.21.12

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The Sixteenth Amendment to the U.S. Constitution was ratified one hundred years ago in 1913. It stated simply: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” Given President Obama’s insistence that individual tax rates on the rich, as he defines “rich,” based on unelaborated Obamian principles of “fairness” that appear to have no bounds, it is time that we amend our Constitution to limit the ability of our Federal Government, and our state and local governments, to tax.

First, a word about the principle of fairness. Arguably, based on IRS figures, fairness would dictate that the tax rate on the “rich” should be decreased while the tax rate on the middle income should be increased. As Peter Ferrara pointed out on this page on December 5: “[A]ccording to official IRS data, the top 1 percent of income earners pay 39 percent of all federal income taxes, three times their 13 percent share of income, and [] the middle class, the middle 20 percent of income earners, pays less than 3 percent of all federal income taxes, while earning 15 percent of income…”

And I don’t understand why it is fair to have the majority vote to increase taxes on the “rich.” Why is it fair for people to vote to increase the taxes of some others but exempt themselves? I might add here that I find it remarkable that exit polls showed that 60% favored increasing the taxes of the wealthiest 2%. Why do I find this remarkable? Because only 60% favored it. Why would not 99% (everyone in the 98% and half of those in the top 2%) favor it? It may be that the middle class may know they will be next. As the President stated at a private home in Virginia on December 6, “Everybody is going to have to share in some sacrifice, but it starts with folks who are in the best position to sacrifice…” (italics added). It starts with them, but will soon be coming to the rest of you.

In France, President François Hollande has proposed raising the highest tax rates to 75%. In principle, there is no reason that such rates, or higher rates, could not be imposed in this country. When the Sixteenth Amendment to our Constitution was drafted, it should have included some form of cap. It is now right to put caps into our Constitution rather than to rely on statutory law since, as have seen, statutory law is subject to the vagaries of a vague, unprincipled President and his Democratic Senate majority who think they have received a mandate from the people in the 2012 election that exceeds the mandate of the Republican majority in the U.S. House of Representatives in the very same election.

While a Balanced Budget Amendment may still be useful and have its independent rationale, it is time to limit the government’s ability to tax. It is proper to insert such a limit in the Constitution because limiting government was the rationale of the American Revolution and is the subject of much of the Constitution and its Bill of Rights.

The limits should appear in two ways. First, some forms of taxation should be barred -- by all levels of government: federal, state and local. The precedent is California’s Prop 13 of 1978 limiting taxation of real property.

Two such forms we should consider are estate taxes and taxes on dividends. The assets that form your estate at death were taxed at the time they entered your estate. There is no reason to tax them again when these assets leave your estate and go to your charities, spouses, children, grandchildren, and other beneficiaries.

Similarly, profits of corporations were taxed before dividends were declared. Dividends are paid after corporate taxes are paid. There is no reason to tax these dividends when stockholders receive them. At one time stocks were owned by the “rich.” That is no longer the case. A huge percentage of Americans own stock directly, or through their personal retirement plans (401ks and IRAs), or through their union or employer pension plans.

A third form is the exclusion from taxation by all levels of government of money spent on health care. This is treating health care like food. Many states exempt groceries from sales taxes. Health care and food are necessities. Instead of narrowing Health Savings Accounts as Obamacare did, we should expand the non-taxation of health care expenses. This would help the poor, the middle class, the elderly, the chronically ill, immensely.

The second form in which limits should appear in an amendment to the federal Constitution is a numerical percentage cap. We have had an Alternative Minimum Tax (AMT) for 30 years. We should have a Maximum Tax. Just as a taxpayer now first prepares a tax return according to normal tax principles, and then prepares an AMT, the taxpayer would then prepare a return that shows the Maximum Tax and would pay the lesser amount.

The language of the Constitutional amendment may be like the following: “No person shall pay taxes on gross income or on property in a year that shall exceed X% in all federal taxes, Y% in all state taxes, and Z% in any other governmental taxes.” The language should be kept simple.

I write “all federal taxes” and “all state taxes” because I would include every form of federal taxes, every form of state taxes, every form of local taxes -- income, personal property, real property, sales taxes, occupational taxes, excise taxes. So limited, no level of government could shift taxation from a limited form to an unlimited form of income or property.

Businesses could continue to grow and pay additional taxes in absolute dollar amounts; it is the percentages that would be capped. Also, I would not necessarily distinguish between individuals and their businesses, or between small and large corporations.

I would allow for an exception to the federal cap in the case of a national emergency -- declared by the president and confirmed by two-thirds of Senate and two-thirds of governors, for a term of one year, renewable by same process. We could consider how to anticipate an emergency limited to one or more states that did not arise to the level of a national emergency.

I would also want to consider how to address the temptation of a taxing authority trying to bypass these caps by artificially increasing the value of assets.

Maybe a Max Tax Constitutional Amendment should be included in the negotiations on the fiscal cliff or the debt ceiling. If Obama succeeds in raising tax rates, maybe it should be the last time any President or Congress does so.

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About the Author
James M. Thunder is a Washington, D.C. attorney.