THE ENTIRE POINT OF AN ECONOMY IS TO CREATE WEALTH:

First, let's consider the constitutional issue at hand. Article I, Section 8 of the U.S. Constitution establishes the power of Congress "To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States," however this power is not absolute. A second clause constrains this power, noting that "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

The "Capitation Clause," as it is sometimes called, divides taxation into two categories: direct and indirect. Indirect taxes include those specified in the earlier clause, "Duties, Imposts and Excises." A direct tax is a different instrument, constitutionally speaking. Before we get to the definition of that term though, suffice it to say that the Capitation Clause imposes substantial constraints on the enactment of direct taxation. In order to pass constitutional muster, the burdens of a direct tax must be apportioned across the individual states according to their share of the national population. This requirement would preclude a national tax policy, as that burden would be assessed for a state as a whole. Virginia would "owe" a sum commensurate with its population, as would California, as would Idaho and so forth. The rate of direct taxation on individuals living in each state would accordingly vary to the point of making such a tax system politically impractical if not impossible to administer.

The applications of the Capitation Clause have undergone some modification in our constitutional history. In 1909 Congress passed the 16th Amendment. This measure was intended as a workaround that would exempt the direct taxation of income from the apportionment requirement of the Capitation Clause. As the amendment reads, "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."

The history of the 16th Amendment is complex, but its immediate occasion came from a revision to the tariff system - the main source of the federal government's revenue for most of the 19th century. While debating the Payne-Aldrich Tariff Act of 1909, a group of anti-protectionist Democrats proposed a revenue swap that would replace the import tariff system with an income tax and thereby alleviate the former regime's burdens on international trade.

The income taxers of 1909 recognized that they had a constitutional problem though. They previously attempted to initiate the revenue swap strategy in 1894, only to run directly into the Capitation Clause. Within a year of its enactment, the Supreme Court invalidated a key portion of the 1894 income tax on the grounds that it imposed an unapportioned direct tax, running afoul of the constitutional requirement. The complex findings of the Pollock v. Farmers Loan and Trust case were controversial in their day and some members of Congress wished to press the case further by attempting another legislatively enacted income tax in 1909. To defuse the volatile constitutional situation, President William H. Taft negotiated a compromise that would allow the tariff bill to proceed without the revenue swap in exchange for a new constitutional amendment that would exempt future income taxation from the Capitation Clause and the Pollock case. The 16th Amendment met the ratification threshold four years later, giving us the federal income tax.

Legal arguments for wealth taxation today typically try to bring the definition under the umbrella of the 16th Amendment, or argue around the implications of Pollock, which technically remains a matter of standing case law. Income and wealth are two very different instruments, however, and the "unrealized capital gains tax" relabeling of the latter gives away the game. Income refers to generated earnings - usually taxed on an annual basis - whereas wealth refers to what a person owns, whether or not it increases in value from year to year. A tax on "unrealized capital gains" would thus assess a levy against the change in an owned asset's value even if it remained unsold and thus unconverted into income.

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