The Supreme Court’s ruling on Thursday is difficult to summarize Moore v. United States, which rejected a challenge to a one-time federal tax targeting certain investors in foreign corporations. But the bottom line is that Moore Bad news for anyone expecting the Supreme Court to launch a sweeping attack on the federal government’s ability to raise taxes.
Still, the decision is still great news for billionaires.
Moore The wealth tax is widely seen as a stalking horse for attacks. During his 2020 presidential campaign, Sen. Elizabeth Warren (D-MA) proposed a 2 percent tax on all Americans’ accumulated wealth worth more than $50 million. The idea was that, instead of taxing only the incomes of the very wealthy and leaving their accumulated capital intact, a wealth tax would gradually shift wealth away from the fortunes of wealthy Americans and begin to curb wealth inequality.
The case produced a somewhat dizzying array of concurrences and dissents. Seven justices agreed that taxes on investors in foreign corporations are constitutional, but Justice Amy Coney Barrett wrote a separate opinion, joined by Justice Samuel Alito, that suggested Congress may have less power to tax investors in a “domestic corporation.”
Meanwhile, Justice Brett Kavanaugh’s majority opinion Moore, which was joined by Chief Justice John Roberts and the court’s three Democratic appointees, contended that it leaves the question of whether the wealth tax is constitutionally moot. The opinion even includes a footnote stating that “our analysis today does not address taxes on holdings, assets, or net worth.”
But that is not true. Kavanaugh Moore The opinion includes a bananza of loaded language that any competent tax lawyer could grab to protect their wealthy clients from the wealth tax, should Congress enact such a federal tax in the future.
That said, Kavanaugh’s opinion contains some significant language that would require some right-wing federal judges to roll back ambitious plans to reshape US law along MAGA lines. Kavanaugh wrote that the federal government’s “long settled and established” practices “carry ‘great weight’ in resolving constitutional questions.” so Moore Cautions judges who rely on novel constitutional arguments to undermine longstanding government behavior.
Moore Reads, in other words, like a political compromise, which may explain why the court’s three Democrats join Kavanaugh’s opinion. Four of the court’s Republicans — Justices Clarence Thomas, Alito, Neil Gorsuch and Barrett — all joined in one of two opinions that would have more severely limited Congress’ taxing powers than Kavanaugh’s majority opinion. (Thomas and Gorsuch would have repealed the tax at issue in this case.)
Kavanaugh’s opinion is fundamentally a small-C conservative decision, preserving the power of both Congresses to tax Americans in familiar ways, while ending the power to enact novel new types of taxes such as wealth taxes.
So what is this case?
Moore It stems from a provision in the Tax Cuts and Jobs Act (TCJA), the tax law signed by former President Donald Trump in 2017, that imposed a one-time tax on certain investors in foreign corporations. This one-time tax was intended to offset lost revenue that would result from a broader package of corporate tax cuts contained in the TCJA.
Under this one-time tax, certain shareholders of a foreign corporation must pay taxes on the corporation’s profits, even if those profits have not yet been distributed to the shareholders themselves. inside Moore, for example, the plaintiff owns stock in a foreign company that supplies farmers in India. That company earned substantial income since these plaintiffs invested in it, and TCJA was required to pay $14,729 in income taxes on their company’s earnings.
question in Moore Whether it is permissible to tax the owners of the company on income earned by the company, but not actually distributed to those owners.
Moore Said the answer to that question is “yes.” As Kavanaugh notes, the tax code is full of provisions requiring business owners to pay income tax on business income. Kavanaugh also cited a long line of Supreme Court precedents, including decisions by the Court Helvering v. National Grocery (1938), which established that a corporate shareholder “may not prevent Congress, if it chooses to do so, from imposing a tax on his personal profits for the year.”
so Moore Fundamentally a victory for the status quo. Courts have long held that a company’s owners can be taxed on the company’s income, and Moore It does nothing to change that.
why Moore Bad news for wealth tax
Kavanaugh claims in a footnote that his opinion does not address the question of whether Congress could impose a wealth tax in 2020, as Warren has proposed. But the opinion is couched in language that such a wealth tax would be unconstitutional.
The most damaging part of the opinion, for wealth tax proponents, deals with a strange distinction between “direct” and “indirect” taxes. The Constitution provides for “direct” taxation.will be divided among different states” This means that if New York State makes up six percent of the U.S. population, then exactly six percent of any direct taxes imposed on the United States must be collected from New Yorkers.
As Kavanaugh notes, “Such complex and politically unpalatable results make direct taxation difficult to implement.” Wealth or income is not evenly distributed among the fifty states. So it is extremely difficult to design a direct tax that does not violate the Constitution. Indeed, Kavanaugh writes that “the parties have not specified any apportioned direct tax in the current Internal Revenue Code, and it appears that Congress has not enacted an apportioned tax since the Civil War.”
But what, exactly, is a “direct” tax? before Moore, the answer to this question was somewhat opaque. inside Pollock v. Farmers’ Loan and Trust (1895), the Court cited a wide range of founding-era luminaries explaining what a direct tax was, and their definitions were all over the map.
Kavanaugh Moore The opinion, however, provides a fairly narrow definition. “Broadly speaking,” Kavanaugh writes, “a direct tax is a tax imposed on persons or property.” He added that “property taxes are direct taxes that must be distributed.”
Meanwhile, “indirect taxes are known federal taxes imposed on activities or transactions.”
So Kavanagh seems to be drawing a hard line between taxing wealth (which he calls “property”), and taxing the income derived from that wealth or labor. If an investor owns $50 million worth of stock, a tax that seeks to collect a percentage of that wealth would qualify as a direct tax, while, say, an indirect income tax on dividends produced by that stock would.
As a practical matter, this means that a Warren-style wealth tax would almost certainly be unconstitutional, since it would be nearly impossible to design such a tax in such a way as to comply with the apportionment requirement.
Realistically, this is probably not the worst blow to progressives. There were already deep practical obstacles to the creation of a wealth tax, largely due to the fact that it often Valuing the assets of a wealthy investor is very difficult. Suppose that such an investor owns a valuable and unique work of art – a Picasso, perhaps. How is the government or taxpayer supposed to determine the specific value of these works of art, without hiring a highly specialized art appraiser to do so?
Or, for that matter, imagine a rich man whose family owns a business that is not publicly traded and whose stock has never been sold. How will tax assessors determine whether this person’s stake in the business is worth more than $50 million, the tax threshold under Warren’s proposed wealth tax?
Congress has yet to enact a wealth tax, and these practical problems probably explain at least part of the reason. It is relatively easy to determine how much income a particular taxpayer earned in a given year and tax a percentage of that income. Determining the precise net worth of many taxpayers is difficult.
still, Moore Perhaps a federal wealth tax rests on the future potential. Given Kavanaugh’s declaration that “property” taxes cannot, as a practical matter, be enacted by Congress, Warren’s 2020 proposal will likely die even if Democrats win a supermajority in a future Congress.
