Supreme Court Hears Case That Could Block a Billionaire Tax Before One Even Exists

The U.S. Supreme Court heard oral arguments on Tuesday in Moore v. the United States, a case that could upend the tax system, raise the deficit by hundreds of billions of dollars, increase economic inequality, and prevent the enactment of a wealth tax on billionaires like Jeff Bezos or Elon Musk as proposed by Sen. Elizabeth Warren (D-Mass.), or in a modified form by Sen. Ron Wyden (D-Or.), and endorsed, at least in general principle, by President Joe Biden.

“This could have the biggest fiscal policy effects of any court decision in the modern era,” according to Matt Gardner, of the Institute on Taxation and Economic Policy (ITEP). Gardner's ITEP colleague Steve Wamhoff, wrote last week that Moore "could become the most important tax case of the century," warning that a "broad ruling could destabilize the tax system, enrich many profitable corporations and widen existing economic and racial inequalities.”

“Entire sections of the tax code are unconstitutional if this is unconstitutional,” Sen. Wyden said in a statement. “I can’t imagine the Supreme Court wants to give the wealthiest people on earth billions in tax cuts, particularly at a time when so many Americans are losing faith in the Supreme Court.”

Thanks for your optimism Sen. Wyden, but I can well imagine it. A case like this is the real reason billionaires like Harlan Crow and right-wing operatives like Leonard Leo have plied Justices like Clarence Thomas and Samuel Alito with lavish gifts. It’s not about saving the plaintiffs in this case less than $15,000 in taxes. It’s about potentially saving multi-billionaires like Jeff Bezos and Elon Musk tens of millions of dollars.

Indeed many Congress people have demanded that Alito recuse himself from the case after being interviewed by David B. Rifkin Jr., one of the lead attorneys for the Moore's, for Wall Street Journal articles published in which Alito argued that his lavish billionaire-funded gifts were just peachy.

Oral arguments do not always accurately predict how the Court will rule. But after listening to this week’s oral arguments, there seems at least a reasonable chance that the Court will issue a limited ruling on this case that does not necessarily set a precedent blocking in advance some kind of wealth tax or tax on unrealized capital gains. Some of the conservative Republican Justices like Brett Kavanaugh seemed to be searching for a middle ground that would not upset much of the existing tax code.

The case arises from Donald Trump’s 2017 tax “reform” which included a one-time “Mandatory Repatriation Tax” (“MRT”) on U.S. taxpayers’ retained earnings from their holdings in foreign corporations, to help fund Trump’s other tax cuts. Most of the estimated $338 billion in revenue from the MRT is payable by large corporations like Apple and Microsoft. But it also applies to individuals who own more than 10% of a foreign corporation.

Small investors Charles and Kathleen Moore had invested in an India-based company that could not be taxed in the U.S. but were charged $14,729 under the MRT. The Moores sued the U.S. government for a refund, claiming the MRT was unconstitutional because income must be “realized” before it can be taxed. Their suit was backed by right-wing legal organizations like the Koch’s Americans for Tax Reform and the U.S. Chamber of Commerce. If the Court finds the MRT unconstitutional, it could cost the U.S. government an estimated $338 billion in lost revenue, further increasing annual deficits and the nation's overall debt. Indeed experts estimate a sweeping ruling in the Moore's favor could cost the government trillions over the next decade.

The case is complicated and too much detail on tax law might put many readers to sleep. Suffice it to say that the issue dates back to the original 1789 Constitution which states that “direct taxes” must be “apportioned among the several states.” Historically, this was a sop to slave-owning states who could count slaves as 3/5 of a person when calculating how much money could be raised from each state. In the 19th century, The Supreme Court held that income taxes were unconstitutional unless equally apportioned among each state which was practically impossible.

In response, the 16th Amendment was enacted in 1909 providing that Congress may tax “income” from “whatever source derived.” The 16th Amendment did not define “income” or “source.” The attorneys for the Moore’s argue that money is not income until it is “realized”—i.e. the asset is sold, not just when it increases in value. A number of court decisions since passage of the 16th Amendment have undermined that theory. As one of plaintiffs’ lead lawyers, David Rifkin argued, “It’s a classic example of taxing something that is not income. Unrealized gains are not income by any stretch of the imagination.”

As Justice Sotomayor explained to the Moore’s attorney during oral arguments, “You're asking us to just announce what realization is out of context. And for the last hundred years, we've been studiously avoiding doing that because we recognize that it's dangerous to do that. To a word like "realization," we then have to come up with a working definition that applies to every piece of property and every way in which people gain wealth. It doesn't seem logical to me.”

Justice Jackson added a simple way for the Court to make a limited ruling upholding the MRT without addressing larger constitutional or philosophical questions: “The Court doesn't actually need to resolve any fundamental questions in this case about whether the Sixteenth Amendment requires realization. The MRT taxes income that was actually realized by the foreign corporations, and Congress permissibly attributed the tax on that realized income to U.S. shareholders just as it has done in any number of pass-through taxes throughout our nation's history. The Court could say only that and affirm.”

Justice Kavanaugh and perhaps Justice Barrett seemed sympathetic to a limited ruling. Perhaps Justice Jackson’s approach could command a voting majority, uphold the MRT, leave untouched prior Court rulings, and kick the can on a wealth tax and/or unrealized capital gains tax on the wealthy down the road.