The Supreme Court will hear oral arguments on Tuesday in a case that could both save the rich billions of dollars and hamper President Joe Biden and Democrat from imposing certain types of wealth taxes in the future.
The case, Moore vs the United States, could have sweeping ramifications for the existing tax code, potentially overturning multiple provisions that largely hit well-off Americans and costing the federal government hundreds of billions of dollars in revenue.
The case centers on a measure in the Tax Cuts and Jobs Act, which Republicans in Congress passed in 2017. It created a one-time transition tax levied on shareholders on undistributed profits accrued between 1986 and the end of 2017 by certain foreign corporations that are majority owned by Americans. The provision is expected to raise $340 billion over a decade.
Charles and Kathleen Moore, who were investors in an India-based company, were hit with a $15,000 tax bill because of the provision, though they say that the business reinvested its earnings and never distributed any amount to them.
The couple contends that the transition tax violates the 16th Amendment, which grants Congress the power to levy taxes on income, because they never received any of the company’s profits. Both a federal district court and the 9th US Circuit Court of Appeals rejected their arguments.
Several conservative organizations have filed amicus briefs that take a more sweeping view, claiming that the amendment generally requires income to be realized for it to be taxed. Also, some warn that the 9th Circuit’s decision could enable a federal taxation of wealth.
The Justice Department argues that the transition tax is constitutional, saying the 16th Amendment does not restrict Congress to taxing only realized gains.
While the justices could limit their decision to the transition tax, any ruling in favor of the Moores could inject a lot of uncertainty into the nation’s current tax code and spawn more lawsuits that seek to take down other provisions that impose levies on unrealized or undistributed income. These measures are often aimed at curbing tax avoidance.
Efforts to tax the wealthy
Certain Democrats, including Biden and Sens. Elizabeth Warren and Ron Wyden, and Vermont Independent Sen. Bernie Sanders, have floated levying new taxes on the wealthy to fund their spending plans, many of which are aimed at helping lower-income and middle class Americans.
Some proposals seek to tax annual increases in the value of unsold assets, also known as unrealized capital gains. Currently, this growth is typically only taxed at time of sale.
Other measures would establish a tax on the net worth of the uber-wealthy.
Biden has pushed for a “Billionaire Minimum Income Tax,” which would require those worth over $100 million – the richest 0.01% of American households – to pay a tax rate of at least 25%. It would levy the tax on the wealthy’s “full income,” including unrealized gains.
Similarly, in an effort to pay for the Democrats’ massive spending package in 2021, Wyden floated a short-lived “Billionaires Income Tax” proposal to tax the wealthiest Americans on the gain in value of certain assets every year. It would have only hit those with more than $1 billion in assets or with reported income of more than $100 million for three consecutive years. Wyden framed it as an income tax, hoping to sidestep legal challenges that could arise from attempting to tax unrealized gains.
Sanders and Warren, on the other hand, unveiled proposals during their 2020 presidential campaigns to tax the wealth of the nation’s richest residents. Warren’s plan would have imposed a 2% tax on Americans whose net worth exceeds $50 million, with an additional 1% levy on billionaires.
Under Sanders’ “tax on extreme wealth,” married couples worth more than $32 million would have paid a 1% tax on their wealth above that threshold. The rate would have risen to 2% on net worth between $50 million and $250 million, climbing in increments to an 8% tax on wealth above $10 billion. The tax would have been levied on single filers worth more than $16 million, with the top 8% rate assessed on their wealth above $5 billion.
Although these tax hikes on the rich stand no chance of passing the current divided Congress, a bevy of Democratic lawmakers once again rolled out their proposals in the days leading up to the oral arguments. A coalition of several dozen Democratic representatives reintroduced a bill turning Biden’s plan into legislation. Wyden, along with 15 cosponsors, including Warren and Sanders, formally introduced his measure.
Several groups filing amicus briefs would like the Supreme Court to issue a decision that would block these types of proposals in the future.
“They would like a language of an opinion to make it very hard, if not impossible, for either a Warren-Sanders-type wealth tax or a Wyden-style-unrealized-gain-as-income tax,” said John Brooks, a professor of law at Fordham University, who filed an amicus brief supporting the US government.
Broader tax implications
Though the Moores argue they are contesting only the transition tax, the Supreme Court could take a wider view and overturn many other current tax provisions that typically fall on wealthy Americans.
“A lot of the tax code would be unconstitutional if [Moore] prevailed,” former House Speaker Paul Ryan, who helped draft the 2017 tax cut law, said at a recent panel on tax policy. “I think it’s a misguided challenge.”
“I’m not for a wealth tax, but I think if you use this as the argument to spike a wealth tax, you’re going to basically get rid of – I don’t know – a third of the tax code,” he continued.
The justices could invalidate several international tax rules, which are designed to prevent American residents or corporations from shifting assets and operations overseas to avoid paying US taxes, said Steve Rosenthal, senior fellow at the Tax Policy Center, a non-partisan research organization. They could also negate taxes on the income and gains of certain investments before they mature or are sold, which could spur Wall Street to create more products that allow the rich to avoid paying taxes, he said.
The court could also change the profit reporting rules for pass-through entities, such as partnerships formed by lawyers, doctors or investors. Currently, these businesses’ profits are reported as income on their owners’ individual tax returns, whether distributed or not. The justices could allow these owners to escape income taxes by having the pass-through entities retain more of their profits.
The Tax Policy Center looked at six provisions that tax unrealized or undistributed income and conservatively estimated that federal revenue would be reduced by $87 billion a year if they were not in the tax code. However, the wealthy and businesses could also take actions – such as shifting corporate profits to low-tax foreign countries – that could make the revenue losses “many times larger,” said Eric Toder, an institute fellow at the center.
“If the court invalidates these rules, it will reopen loopholes, strip away Congress’ ability to prevent future abuses and undermine our country’s fiscal health,” Rosenthal said.