By Kelly Sloan | Contributing Columnist, Rocky Mountain Voice
The progressive’s unquenchable appetite for exacting every last ounce of flesh from those who have accumulated more wealth than Bernie Sanders thinks appropriate may have gotten a bit of unsolicited help from the Supreme Court last week.
The Court, in Moore v. U.S., upheld a provision from the 2017 tax reform, the mandatory repatriation tax (MRT), that assigned a one-time tax on shareholders of predominantly U.S.-controlled foreign firms, on retained (and therefore untaxed) earnings proportional to their ownership stake. The 7-2 ruling – with Thomas and Gorsuch dissenting – was rather narrow, as Justice Kavanaugh took pains to note in his opinion joined by Chief Justice Roberts, focusing solely on the specifics of the case in question, but left several observers asking: did this decision just open the door to granting Constitutional benediction to a wealth tax – a tax on unrealized gains?
The answer is no, not exactly, but neither did it rightfully shut, lock, and bar that door, as it ought to have.
At issue in Moore was whether the MRT was a direct tax — and therefore in violation of the Constitution’s requirement that direct taxes be apportioned among states based on population — or a tax on income; and if so, does the 16th Amendment allow unrealized gains to be counted as “income”? This was the question which generated such concentrated interest in the otherwise rather obscure tax case.
Well, the Court managed to circumvent a definitive answer to that question, opting instead to issue a limited and narrow opinion based on precedent. As Kavanaugh writes in the Court’s Opinion, “The Court’s longstanding precedents plainly establish that, when dealing with an entity’s undistributed income, Congress may tax either (i) the entity or (ii) its shareholders or partners.” A bit later: “The MRT attributes the undistributed income of American-controlled foreign corporations to their American shareholders, and then taxes the American shareholders on that income. By doing so, the MRT operates in the same basic way as Congress’s longstanding taxation of partnerships, S corporations, and subpart F income… The MRT therefore falls squarely within Congress’s constitutional authority to tax.”
He does then go on to make clear that they did not answer the question everyone wanted answered; referring to Thomas and Gorsuch’s dissent, and the somewhat limited concurrence brilliantly written by Barrett and joined by Alito, Kavanaugh writes, “For their part, the dissent and the opinion concurring in the judgment focus primarily on the realization issue — namely, whether realization is required for an income tax. We do not decide that question today.”
More’s the pity. Contrast that with Justice Thomas’ quite clear delineation of the issue: “16th Amendment ‘income’ is only realized income. We should not have hesitated to say so in this case.” Or Justice Barrett, perhaps even more clearly in her concurrence: “The question on which we granted review is “[w]hether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states.”… The answer is straightforward: No.”
There are plenty of very, very bad ideas populating the taxation sphere – progressive income tax, capital gains tax, and inheritance tax, just to name the worst offenders. Taxing unrealized gains – such as appreciation of value – ranks alongside them. As it stands, investment income is taxed once it becomes actual income – when the investment is sold or it earns interest – not simply when the value of that investment increases. The left, of course, hates this, because a) it allows the wealthy to hold onto investments and let them grow without being taxed on all of that on-paper wealth, and b) that leaves a bunch of money un-pilfered that could otherwise be redistributed.
But there are reasons those unrealized gains are not taxed, beyond adherence to the Commandment proscribing the coveting of your neighbours goods. Investment income constantly fluctuates; imagine you bought shares in a company that made, say, a new super-battery, and after a couple years of everyone buying this battery the stock price goes up considerably, and you pay tax on that increase. Then comes the FDA finding that these batteries cause blindness and erectile dysfunction in lab rats, and have an unfortunate tendency to explode after a few years. The stock price tanks to pennies of what you paid, yet you have already paid tax on “income” that never has, and never will, come to be.
Nevertheless, there are plenty of Democrats on Capitol Hill that are straining at the bit to tax unrealized gains. The 2017 tax cuts expire at the end of 2025, and the Democrats are already preparing for war, and it will be no-holds-barred; Sen. Elizabeth Warren admitted that last week saying, “Better to let all the Trump tax cuts expire than be accomplices to another slash-and-burn tax bonanza for America’s billionaires.” Translation: better that a million middle-class families get financially soaked by the expiration of tax cuts, then let one billionaire keep one red cent more than she thinks they ought to have.
Lord Percy of Newcastle famously wrote that the objective of socialism was to render property perpetually insecure. One wishes that the U.S. Supreme Court would have taken the lead of Justices Barret and Thomas and been more decisive in safeguarding that security.
Editor’s note: Opinions expressed in commentary pieces are those of the author and do not necessarily reflect the opinions of the management of the Rocky Mountain Voice, but even so we support the constitutional right of the author to express those opinions.