The Democrats' Tax and Supreme Court Dilemma

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Every election loss forces a political party to look into the mirror, but something about Donald Trump and the Republicans’ 2024 victory–simultaneously narrow and broad–has sent Democrats into a spiraling identity crisis.

With core constituencies apparently abandoning them for the Make America Great Again movement, Democrats are questioning everything–their language, operations, and agenda.

Should taxes play a role in this? In a prior piece I looked at whether Vice President Kamala Harris might have fared better if she had leaned further into issues of corporate taxes and avoidance. It could be a way for the party to tap into the populist rage which is still simmering across the nation and the globe.

Democrats have always had a relatively simple and intuitive message on taxes, however. They want to raise taxes on the rich while cutting them, or leaving them the same, for everyone else. Republicans, meanwhile, want to cut taxes across-the-board.

That message may not need that much refining, if only Democrats could get people to believe it.

But events may force Democrats to consider the details of their tax agenda in a much more direct way. And sooner than you’d think–despite their current status as the minority party.

In fact, they may be headed towards a collision with the conservative Supreme Court on the issue, that may force some tough decisions that could either unite or splinter the party.

Right now, Democrats don’t have to do much other than oppose the Republican agenda. That’s the consolation prize for the electoral losers. Much of 2025 will be consumed by the looming expiration of large parts of the 2017 Tax Cuts and Jobs Act. Extending it, or making those parts permanent, is at the top of Trump and the GOP agenda.

There’s much less unity about how to cover the trillions of dollars a full extension would cost, however. They could try to repeal the Inflation Reduction Act, but that would provoke a fierce backlash from the corporations that have already invested millions in clean energy projects supported by that bill’s credits. And it would only cover a fraction of the TCJA extension cost, anyways.

The Speaker of the House, Mike Johnson, R-La., (at least at the moment I'm writing this), faces problems of procedure, policy and arithmetic. With the narrowest House majority in a century, the party can’t afford to lose anyone if they still plan to pass it without Democratic votes. That would include the caucus of Republican representatives who want to raise or repeal the cap on the federal deduction for state and local issues–an issue worth opposing the party over for those in moderate suburban districts. There are also deficit hawks who may refuse to vote for something that significantly increases the debt, and they too see this as something worth going to political war over.

The puzzle leaves Republican leadership with few options. And one of those that is increasingly gaining steam is for Congress to cut the bill’s cost by extending the TCJA for a shorter period, maybe as short as four years. That might make the math easier, especially since the Congressional Budget Office and the Joint Committee on Taxation typically estimate costs based on a 10-year timeframe. But it would mean doing this all again in just a few years.

This is where Democrats could come in. Predictions are a fool’s errand in politics, but it’s about as close to a sure thing as possible that Republicans will lose seats in 2026–probably enough for the Democrats to reclaim the House. There’s almost always a backlash to a newly elected president, and the last time Trump was in office he saw his party lose 41 seats, eight times the current margin. (It doesn’t always happen–Republicans did surprisingly poorly in the 2022 elections under President Biden. But they still won the House.)

So a short extension would almost certainly mean that the Republicans, and maybe even Trump, would have to make an agreement with their loathed rivals. Democrats, in turn, would probably insist on more drastic tax hikes to pay for a further extension.

In effect, Republicans who would never approve a tax increase themselves may be voting for one in effect by tossing the ball to Democrats with a short extension.

Democrats will need to choose what type of tax hike they want, however. Raising the corporate tax rate would be the low-hanging fruit. It’s unclear how many percentage points they raise it, however, and it likely wouldn’t be enough to cover the full extension and the priorities that the party would want to pursue given this opportunity.

Likely, the pivotal issue in this showdown would be taxes on assets and wealth–increasingly, the focus of the Democrats’ tax-the-rich rhetoric.

While corporate behemoths like Wal-Mart or Amazon may have once held the stage as central villains, they’ve been recently replaced with bombastic, outsized billionaire personalities like Elon Musk and, of course, Donald Trump. When individuals have accumulated once-unthinkable fortunes–Musk has recently unseated John Rockefeller as the richest American in history–just adjusting the tax rates on the vehicles of their earnings likely won’t satisfy many on the left. They want to access those vast reserves of wealth, which can only happen by changing the entire way the tax code approaches assets.

The current system, everyone (mostly) agrees, is biased for assets, and against earnings. At least, earnings as traditionally defined. The government gets a clear cut of money you make–often, at the very moment you make it–but assets can grow in size without getting touched by the government, until the moment they’re sold or passed on. (Sometimes.) Since the owners of valuable assets, whether they be stocks, cash holdings, or Rembrandt paintings, tend to already be rich, this bias favors existing wealth over strivers. (And racial inequality, according to one tax professor.)

Thus, the rich are accused of not paying their "fair share"--a nebulous concept but one that's always registered with the public.

There are a plethora of reasons for this bias–a lot of it comes down to simple human nature, that people will always fight harder to protect what they have, than what they could obtain. But there’s also a constitutional element–the U.S. Constitution’s requirement that “direct” taxes be apportioned by state. In effect, this is a hard restriction on direct taxes, often considered to be taxes on property. It goes back to the slaveholders at the constitutional convention, worried that the North would try to tax slavery out of existence.

The apportionment requirement has long been a question mark looming over proposals to tax wealth directly. It’s been seen as less of a threat to proposals–or existing tax provisions–that tax the unrealized gains of assets. Until recently.

The Supreme Court held the first significant hearing on taxes and apportionment in decades last year, in Moore vs. United States, which challenged the TCJA’s mandatory repatriation tax. The TCJA was upheld, but many of the justices indicated they believed that the 16th Amendment, which authorized income taxation, can only apply when income is realized.

This calls into question many of the proposals that Democrats have floated as a way to better tax the richest Americans. Maybe Sen. Elizabeth Warren’s “Two Cent” wealth tax proposal was always far-fetched, but Sen. Ron Wyden’s mark-to-market tax on unrealized capital gains and President Biden’s 25% minimum tax on billionaires seemed more legally feasible. Until now.

I’m not going to delve into the specifics of the legal question here–enough ink and pixels have been used up on that already. Rather, I’m interested in the political dynamics. Can Democrats bring themselves to pay for costly programs and tax extensions with revenue-raising proposals that may well be struck down? Can they responsibly risk adding even more trillions to the deficit?

I’m sure some would say they should–dare the Supreme Court rip apart the tax code and highlight how far right they’ve tilted over the past decades. But others may pause at the prospect, and would feel responsible for enacting legislation resulting in unbalanced spending.

The uncertainty amounts to a restriction of its own, regardless of the legal analysis. Political capital is finite, and lawmakers facing difficult votes want to know that their policies will stick. They'll look to other options--but the alternatives here may be few.

For some reason the constitutional aspect of wealth taxation hasn’t gotten that much notice outside of tax circles. Of course it’s wonky–but I suspect many Americans would be surprised to learn that an archaic-sounding clause in the Constitution, related to slavery, would continue to restrict policy options today. Given how many high-profile issues have been decided by the court on constitutional grounds, constitutionality has taken on a moral nature to many. “Constitutional” has become synonymous with “virtuous.” For constitutionality to hinge on an arbitrary artifact of history feels wrong.

But constitutional clauses can’t be ignored, no matter how much their context has changed.

And, some would argue it isn’t arbitrary at all, that the constitution’s restriction on direct taxation, however clunky, reflects the Founder’s wariness of taxation on property alone.

Constitutionality may be the most pressing question about wealth taxation, but it’s not the only one. There are also important concerns about administrability, as well as ones of principle.

The taxation of income is justified on ability-to-pay principles, as well as the general intuition that income reflects how much you benefit from the markets and stability that government provides. The ownership of assets, in and of itself, raises different questions. Is it right to tax income that is only theoretical? Or assets which don’t do much more than exist?

The current structure of the economy has spawned a generation of ultra-rich Ebenezer Scrooges, who only consume a tiny fraction of their fortunes. (Even if that fraction is still more extravagant than any normal person could fathom.) Maybe the taxation of Elon Musk isn’t so far out of whack, compared to the material advantages his wealth provides. (To the extent that it isn’t, that can be addressed with less drastic measures.) Nevertheless, he is the only person on Earth who knows what owning nearly half a trillion dollars feels like–is that, in and of itself, worth taxing?

And if the purpose of taxation isn’t just to collect revenue for the government but to change the structure of the economy–to cut off the growing prospect of trillionaires and turn ultra-billionaires into mere single-digit billionaires–are Democrats ready to enact the kind of rates that would make that possible? Is that what Americans really want when they vote for populist firebrands promising to burn the establishment down?

Tough questions. Fortunately, Democrats will have some time in the political wilderness to consider them. But not that much time.

Contact the author at amparkerdc@gmail.com.