Lawmakers have been increasingly interested in taxing the ultra-rich, but a recent Supreme Court ruling could pose a threat to future wealth tax proposals. In the case of Moore v. United States, a challenge to the “mandatory repatriation tax,” which is a one-time levy on certain foreign investments enacted in 2017, was blocked by the Supreme Court. The case revolved around a U.S. couple who faced taxes on undistributed profits from an overseas company. The Moores argued that this levy violated the 16th Amendment since they did not “realize” or receive income from it.
Many tax experts closely followed the Moore case to assess Congress’ authority to tax unrealized earnings, as it could have implications for wealth tax proposals. Despite this, the Supreme Court did not directly address the issue. Justice Brett Kavanaugh emphasized in his majority opinion that any congressional effort to tax both an entity and its shareholders on the same undistributed income would not be authorized. This ruling has sparked speculation among experts about the possibility of certain versions of a wealth tax being constitutionally viable.
Supreme Court Justices’ Opinions and Potential Roadblocks
In concurring and dissenting opinions, Justices Amy Coney Barrett, Samuel Alito, Clarence Thomas, and Neil Gorsuch argued that realization is required for taxes under the 16th Amendment. One more justice aligning with this view could create a majority opinion in future cases, posing a potential roadblock for proposals like Biden’s billionaire tax. Biden’s plan involves a 25% tax on unrealized gains for households with wealth over $100 million, designed to ensure that no billionaire pays a lower federal tax rate than essential workers like teachers or nurses.
The clash between the Supreme Court’s opinions and Biden’s tax proposal has led experts to believe that they are heading towards a collision. Alan Cole, a senior economist with the Tax Foundation’s Center for Federal Tax Policy, highlighted the uncertainty surrounding the future of Biden’s tax proposal, particularly given the unpredictable control of Congress. This uncertainty comes at a time when federal wealth taxes gained national attention during the 2020 presidential primaries, with proposals from Senators Elizabeth Warren and Bernie Sanders, alongside Senate Finance Committee Chairman Ron Wyden’s similar billionaire tax proposal.
Challenges Surrounding Wealth Tax Proposals
The central issue surrounding wealth tax proposals relates to whether they are considered a “direct tax” that must be apportioned among states based on the Constitution. Given that direct taxes are to be split among states according to their population percentage, the idea of apportioning wealth taxes poses a significant challenge. Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, emphasized that no taxes are typically apportioned, making it a seemingly impossible task.
During oral arguments for the Moore case, Solicitor General Elizabeth Prelogar mentioned the need for a wealth tax to be apportioned among states, casting doubt on proposals from Warren and Sanders. Kavanaugh’s majority opinion, which distinguishes between direct and indirect taxes and references Prelogar’s viewpoint, raises concerns about the constitutionality of wealth tax proposals that rely on yearly taxes of capital gains. Even the proposals from Biden and Wyden, utilizing “mark-to-market” systems for capital gains, may face scrutiny for their constitutionality.
The recent Supreme Court ruling has introduced uncertainty around the future of wealth tax proposals in the U.S. The clash between judicial opinions and proposed tax reforms underscores the complexities and challenges in implementing a viable wealth tax system. As the debate continues, the constitutional and practical hurdles facing wealth tax proposals remain significant, casting a shadow of doubt on their feasibility and implementation in the near future.
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