The Carriage Tax (Update)

0:00Support for NPR and the following message come from Edward Jones. What does it mean to live a rich life? Maybe it's full of brave first leaps, tearful goodbyes, and everything in between. And with over 100 years of experience, your Edward Jones Financial Advisor can help. Edward Jones, member SIPC. This is Planet Money from NPR. There is a kind of tax that a lot of people have imagined and dreamed of, really, for years now. a wealth tax. A way to tax people not just on what they earn, but on what they own. Houses, stocks, Picassos, super yachts, thoroughbred horses, whatever. Supporters of this idea tend to be pretty progressive.

0:48And they say a wealth tax would be this powerful way of fighting inequality. But the legality of a wealth tax, that has been in question for a long time. And this term, the Supreme Court had a chance to weigh in. The case that gave them that chance? It's called Moore versus the United States. So the Moores are an American couple named Charles and Kathleen Moore. And in the mid-2000s, they invested in this business in India that provides equipment to low-income farmers. Over time, this business grew, it made profits, and the profits got reinvested in the company. Now, usually when that happens, the company's investors, they can defer taxes on those profits if they're made outside the U.S.

1:29But in 2017, Congress passed a new law that said for foreign corporations, Americans like the Moors would have to pay a one-time tax on those profits, even if the profits never actually reached their own pockets. The Moors argued they were being taxed on what investors call unrealized gains, where the money is there on paper, but it's still invested and not yet turned into cash. In other words, it's not income. It's like basically wealth. And the federal tax system doesn't really tax wealth. So the Moors joined up with a conservative group that opposes a wealth tax, and they sued. And when their suit made it to the highest court in all of the land, it gave the justices an opportunity to decide something bigger.

2:14Not just whether the Moors should have been taxed on their unrealized gains, but also whether the government can tax other assets that, you know, people hold onto, that grow in value over time. Like land or rare vinyl from the clash or like antique cars or, you know, thoroughbred horses. But instead, the court made a very narrow decision. They said to the Moors, sorry, but those taxes you paid, they are legal. Those profits that were made overseas, they count as a form of income. And that is where they left it. So these bigger questions about changing the whole scope of what the government can or cannot tax, they said those were, quote, potential issues for another day.

2:58And so those legal questions around taxing wealth, they still stand. Which brings us to today's story. It's an episode from 2019, an episode I reported that looks at this famous early proposal for taxing wealth in the United States. It turns out we've been living with this idea for a long time, since basically the start of our nation. Here's the episode. Greg, you're back. Yes, I am. I was just in Mount Vernon, the historic home of George Washington. Wow. And I had a great tour. George Washington said, There was no estate in all of United America so pleasantly situated. That's Betty Brown. She gave a really great tour of Mount Vernon.

3:40Now, the river's about a mile wide here. And she taught me a lot about George Washington. He was a great leader, also a slave owner, and he was a military genius. His teeth were not wood, but his house was. That's common, though, right? Or I guess it could have been brick. Well, yeah, he wanted you to think it was made of stone. I was interested in all of those things about George Washington, but I actually went down there to see one thing. Now, Greg, I was told that you were especially interested in the carriage. A carriage, like a horse-drawn carriage, super old, super fancy carriage. So here's a carriage.

4:19Oh, wow. This is really, really nice. There's an insignia on the side and the front. There's a light. This looks like the Rolls Royce of carriages. Absolutely. Carriages like the one in Mount Vernon, they are surprisingly important to a debate about a wealth tax. Right. And it's a debate that's actually been going on since about 1794. Because that year, George Washington, he wanted to raise money and he decided a good way to do that would be to tax the rich. And you know what's a good way to tell if a person is rich back in 1794? If you have a glistening, majestic carriage. And Washington decided to place a tax on these carriages.

4:56So this carriage tax is kind of like the first federal wealth tax. It's not a tax on sales or income. It's a tax on stuff you own. And this tax opened up this huge debate about what kind of taxes are constitutional and which ones are not.

5:13Hello and welcome to Planet Money. I'm Brian Durstat. And I'm Greg Rosalski. Today on the show, what a wealth tax today has to do with a tax on horse-drawn carriages all the way back in the 1790s. There will be constitutional law. Uh-oh.

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6:17Capital One. What's in your wallet? Terms apply. Details at CapitalOne.com. This message comes from Insperity. Excellence takes drive, work, perseverance. Tiger Woods brings it to the course. Insperity brings it to your business. Want to be the best? Work with the best. Insperity. How you HR matters. Learn more at Insperity.com slash tiger. What are we talking about again? Oh, yeah. Carriages. Let's roll. All right. So full disclosure. Yeah. The carriage Betty showed me, that was not George Washington's carriage. I was so disappointed because George Washington's actual carriage was apparently amazing.

7:04Like the perfect carriage. He had this incredibly ornate cream-colored coach with gold trim. That's Lindsay Trevinsky, a historian at the White House Historical Association. And I asked her to tell me all about George Washington's sparkling white carriage. Right. And think about that. A white carriage in those days was just this unbelievably ostentatious thing to drive around in because the roads weren't paved. There are no sewage systems. Every time you take your carriage out, it's going to get disgusting. And so having a cream-colored coach demonstrated your wealth, that you had enough money to pay for labor to basically clean your carriage every time you went out.

7:42So the story starts. Washington, incredibly rich. He's got a beautiful carriage, is helping get a new government up and running, and they need money. There's no income tax yet. Sales tax isn't really bringing in enough. And so he, along with Alexander Hamilton, his treasury secretary, decide to tax the wealthy. So they say in 1794, it's perfect. Let's do it. Let's pass a national tax on carriages. And they did. I looked into this bill, and it's weirdly specific because they're actually taxing many different kinds of carriages. And all these different carriages, they're all taxed at different rates.

8:14Yeah, we looked at these together, and I kind of love the different kinds of carriages you got there. It begins with what's called a two-wheel top coach. That's taxed at$2 a year. Yeah, fight tons. It's like a sports carriage. You can get that for your midlife crisis,$6 per year. Also, there's a coachee, which is like a convertible coach. which is my favorite personally, it's taxed at$6 per year. Chariots, I don't know what that was all about. $8 per year. So there are all these taxes. And you know what rich people or, you know, like upper, upper middle class people with coaches don't like? They don't like being taxed.

8:47There's a growing political party called the Jeffersonian Republicans or the Democratic Republicans, depending on who was talking about it. But they were sort of the anti-government party. And so they really opposed these taxes, and it was very much sort of a Virginian-led effort. One of the leaders of this group was none other than James Madison. He's a 5 '4 Virginian, he was raised on a plantation, and he's known as the architect of the American Constitution. Madison hated the carriage tax, and he decided he was going to stop Washington and Hamilton from ever getting a dime in carriage tax revenues.

9:20And because he played a big part in writing it, Madison knew that hidden inside the Constitution was a clause that could make the carriage tax really hard to defend. And we have here our trusty Planet Money copy of the Constitution. It's just a printout I got off the Internet. Greg, why don't you read the clause that Madison was going to use to try to strike down the carriage tax? Okay. So it's right at the top here and it begins, quote, representatives and direct taxes shall be apportioned among the several states. A lot going on in there, so I'm just going to read it again. Representatives and direct taxes shall be apportioned among the several states.

9:58We're going to go through that line really slowly. First up, apportioned. It's just kind of like an old word that basically means divided up according to population. Like, for example, we apportion representation in Congress. Every decade, we count the number of people in each state and we divvy up the House of Representatives based on population. Here's Beverly Moran. She's a professor at Vanderbilt Law School. Under the Constitution, we know that representatives in the House of Representatives are apportioned by population, which is why you have, you know, what, 40 congresspeople or representatives in California and one in Wyoming.

10:41OK, so that's the first part of the clause, that representatives shall be apportioned among the several states. But this line in the Constitution also says direct taxes shall be apportioned among the several states. In other words, if the federal government imposes a direct tax, each state has to pay in proportion to its population. So think about that. If a state has 10 % of the population, it then has to pay 10 % of the total tax collected nationally. Now, not all federal taxes fall under this weird rule, only direct taxes. And Greg, you have been so deep in the weeds on this. What is a direct tax?

11:19Just say it. Okay, so it's a little complicated, but super simplistically, it's a tax on property, not a tax on transactions. So like not a sales tax, but maybe a tax on a house or like a silver collection. But Beverly Moran says that line was not about taxing houses. It's talking about enslaved people. Yeah. Beverly says this line was written into the Constitution to protect slavery. So, 1787, Madison, all the other founders, they are writing the Constitution, trying to form a union. And the South didn't want to join. That is, unless they got some assurances. The Southerners demanded protections within the Constitution.

11:57Protections, basically, for their Southern economy, which was based on owning land and slaves. And Moran says that's what this line in the Constitution about apportionment of direct taxes is really about. Because the Southern states had more land and they had more slaves. This line in the Constitution meant that if there were ever a tax on slaves, the states in the North would also have to pay a huge chunk of that tax, just because they had a huge chunk of the population. So it was basically a tripwire to prevent the North from ever passing a direct tax on enslaved people. So you'll remember that James Madison and all his carriage tax-hating friends are looking for a way to strike down George Washington and Alexander Hamilton's carriage tax.

12:39And so the anti-carriage tax gang makes a plan. Let's fight it in the courts. Here's Lindsay Chervinsky again. A group of Virginians decide that they need to find a way to bring it to the Supreme Court to test its constitutional validity. But there's a hitch. Basically, the courts had a rule that prevented small, unimportant cases from clogging up the judicial system. And the rule was that there had to be at least$2 ,000 at stake in any case, which was a lot in those days. Way more than any regular upper-class person was going to be taxed on their carriages. So the anti-tax gang needed to find someone with enough carriages to meet the threshold.

13:14So they had to find someone who was so insanely wealthy that they were going to be paying all of this money on carriages. And they settle on Daniel Lawrence Hilton, who had 125 carriages. And when I first read that, I thought, surely that must be a typo. How do you have 125 carriages? Legal scholars have decided, yeah, it was a typo. Or like a special kind of typo? Yeah, a lie. A lipo. I'll be at the tavern all week, Greg. You're killing it, Brian. Two tankard minimum. Anyways, it was true that Daniel Lawrence Hilton was a prominent person in Richmond, Virginia. But it was not true that he owned 125 carriages.

13:59He owned just one chariot. Oh, I know that guy. Oh, boy. Daniel Lawrence Hilton. Both sides apparently agreed to bend the facts of the case so the Supreme Court could make a decision about the carriage tax. Like, basically, both sides wanted this to happen. So they come up with this, I guess, this legal fiction, and it's going to go to the Supreme Court. And that day comes in 1796. So on one team is Daniel Lawrence Hilton and his lawyer, Pennsylvania's attorney general. And they trot 125 imaginary carriages all the way to the Supreme Court in Philadelphia. It's a short trot. And on the other side, Alexander Hamilton.

14:36He heads there, we can only assume, by real carriage to represent George Washington and the carriage tax. And the room was absolutely packed with congressmen and visiting dignitaries who wanted to see Hamilton give his arguments and wanted to see the outcome of this case. It must have been quite theatrical. So first up, Pennsylvania's attorney general. And here's what his argument is. He brings up that one line in the Constitution and he says, A tax on carriages is a direct tax. So if Mr. Hamilton and his bunch of tax-crazy cronies want to tax carriages, they can't just say it's$6 a chariot and$5 a cochi or whatever.

15:14You're going to have to have everyone chip in according to the population of their state. So the carriage tax, as it stands, dear sir, violates the Constitution. Then it was time for the main event. Alexander Hamilton, he stands up, and even though he had a cold at the time, He argues for three whole hours. Now, there isn't a good record of his speech. And a lot of what he said was apparently confusing, maybe because of the sniffle. And of course, none of it is in the musical. But it didn't matter. Yeah, because the Supreme Court decided in favor of Hamilton. They uphold the carriage tax, mostly because the justices were like, that line in the Constitution, it's a mess.

15:53They literally say apportioning a carriage tax would be absurd and radically wrong. The justices say, look, we know what this is about and we should treat it that way. This line in the Constitution should only apply to what the compromise between the North and the South was about, taxes on land and taxes on slaves. Those are the only two clear direct taxes. And we should only apply this rule when it reasonably applies. And the story ends like that with Alexander Hamilton, the world's most handsome person as far as American money is concerned, trotting off into the sunset in his carriage, happy to pay his carriage tax of$8 per year.

16:32Coming up after the break, carriages. What again does this have to do with the wealth tax?

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18:32The wealth tax idea has not gone away. And it seems like each election cycle, there's like a new push from progressives to consider one. Here's Senator Elizabeth Warren making the case during the 2020 election cycle. The rich are not like you and me. The really, really billionaires are making their money off their accumulated wealth, and it just keeps growing. We need a wealth tax in order to make investments in the next generation. We've talked about a wealth tax before on this show. Quick refresher, it taxes rich people on everything they own, all their property, big houses, Teslas and Porsches, yachts and helicopters.

19:11All that stuff. Tigers. So why tax wealth? Because a lot of really rich people, they don't actually have huge incomes. They don't need them, which makes an income tax a pretty weak tax on them. And if a wealth tax is ever somehow passed, it seems pretty clear that rich people are going to fight it. And Beverly Moran says they're going to use similar arguments to the ones that were used against carriage taxes all the way back in the 1790s. Every billionaire is going to make this argument and they're going to be able to hire half the lawyers in the United States to, you know, argue it for them. Right.

19:44And those billionaires and the Democrats who want to tax them, they're all going to go back and fight over that line in the Constitution. And Beverly Moran says that is a shame. There might be many reasons not to have a wealth tax, but one reason should not be that there's a provision in the Constitution that was placed there in order to protect and support slavery. That's basically the argument that the justices in the carriage tax case made. There are a lot of scholars, mostly wealth tax supporters, who say this constitutionality question, we've solved it already, all the way back in the 1790s.

20:21We should listen to those justices from the carriage tax case. And we should only pay attention to this clause about direct taxes when it reasonably applies. They say it was written about slavery and applying it to a wealth tax is unreasonable. Beverly Moran and a lot of other people say that is not a slam dunk argument. Supporters of the wealth tax are going to face an uphill battle in the courts. But she says there's one surefire way to make sure it's constitutional. We can amend the Constitution. Oh, absolutely. I mean, I've written articles that have advocated for wealth tax. But I've always said this is something that would require a constitutional amendment.

21:00All it's going to take is two-thirds of Congress. And three-quarters of the states. Or I guess we could just call a constitutional convention. That hasn't happened since 1787.

21:14Greg writes a newsletter for Planet Money every week. It is amazing. We love it. He's done a bunch of reporting for us about what a wealth tax could look like and a bunch of other pieces, too. Greg, what have been some of your favorite newsletters recently? Yeah, I've been writing about the effect that AI is having or not having on the economy. I've been writing about this startup boom that we're seeing in this country. and I'm really excited to, you know, follow the money in the campaign season. This episode was originally produced by Nick Fountain and Liza Yeager with help from Sarah Gonzalez.

21:45The update was produced by Willa Rubin and fact-checked by Sierra Juarez. It was edited by Molly Messick and Alex Goldmark, who is also our executive producer. Special thanks to the constitutional scholars Bruce Ackerman and Eric Jensen. I'm Greg Rosalski. I'm Jeff Guo. This is NPR. Thanks for listening. This message comes from the International Rescue Committee. Co-founded with help from Albert Einstein, the IRC provides emergency aid and support to people affected by conflict and disaster. Donate today by visiting rescue.org slash rebuild. This message comes from Mint Mobile. At Mint Mobile, their favorite word is no.

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