This Supreme Court case could pave the way for a ‘wealth tax’
Charles and Kathleen Moore, a retired couple living in Washington, invested in Kisan Kraft, a company in India that sells farm equipment. They claim they never received a profit from their investment but were required to pay $14,729 in taxes in 2017. This prompted them to pursue a legal battle, which has reached the Supreme Court.
The Moores invested $40,000 in the Indian corporation in 2005, which earned them 13% of the company’s shares. Kisan Kraft chose to reinvest the earnings instead of paying shareholder dividends. Yet the Moores were still asked to pay the one-time tax bill.
“If you haven’t received any income, how can you be required to pay income taxes?” Charles Moore asks in a video posted by the Competitive Enterprise Institute, a libertarian group that is representing the Moores. “It seemed, to both of us, unconstitutional.”
Should the Supreme Court side with the Moores, it could bring instability to the U.S. tax code, experts say. But a decision against the Moores could leave the door open for other types of taxes on wealth.
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Tax expert: Moore case about corporate America vs. ultra-wealthy individuals
The policy of paying a one-time repatriation tax on earnings from foreign corporations was enacted as part of the Tax Cuts and Jobs Act of 2017 under the Trump administration. This tax was imposed — whether shareholders receive their earnings or not — to offset losses as the corporate tax rate went from 35% to 21%, as USA Today reported.
David Lesperance of tax and immigration law firm Lesperance and Associates said the 2017 law benefitted multinational corporations since they weren’t subjected to the tax on unrealized gains, as were individuals.
Now, in the Moore case, “the amount of tax we’re talking about wouldn’t fund two associates at the law firms that took it to the trial stage, let alone appeals court and SCOTUS,” all of which have ruled the tax on unrealized gains as constitutional, he told the Deseret News.
“The Moore case is being funded by people who don’t want to see a wealth tax,” Lesperance said, before putting it simply as an interplay between corporate America and ultra-high-net-worth individuals.
In even simpler terms, “you could say it’s a power play between Amazon and Jeff Bezos,” the tax attorney said.
Court justice concerned about ‘leaving the door open’ for other wealth taxes
During Dec. 5 oral arguments, Andrew Grossman, representing the Moores, argued the one-time tax payment on unrealized income is unconstitutional since it is a “tax on ownership of property.”
“As a matter of constitutional text, history, and case law, the Moores are correct,” Anastasia Boden, the director of the Robert A. Levy Center for Constitutional Studies at the Cato Institute, a libertarian think tank, told the Deseret News. “The term ‘income’ in the 16th Amendment has a realization component.”
What she means is that in most cases, taxes are levied on wages a person earns, or on earnings after an investment has been sold, not on “wealth” that exists only on paper.
“If the Supreme Court accepts the government’s argument to the contrary, it will empower Congress to pass a slew of taxes in a way that was neither intended nor envisioned by the Constitution’s drafters,” she added.
U.S. Solicitor General Elizabeth Prelogar, representing the Biden administration, said during oral arguments that a ruling against the mandatory repatriation tax could have a significant impact on the U.S. tax code as the framework of the expansive 2017 tax law, which generates about $350 billion and discourages tax evaders, comes under question, according to Roll Call.
Justice Neil M. Gorsuch questioned Prelogar about the implications of siding with the government, which will empower Congress to endorse a wide range of taxes, like Sen. Elizabeth Warren’s 2% tax on “ultra-millionaires” or Biden’s Billionaire Tax, which also targets millionaires. Neither of those bills do not have enough bipartisan support in Congress. Still, Gorsuch asked, “Would you agree, general, that when the Court opens a door, Congress tends to walk through it?” To this, Prelogar responded, “That door is already open,” citing Congress’ authority to tax various kinds of investments.
What could the high court ruling look like?
If the Supreme Court decides to rule in favor of the Moores and strike down the mandatory repatriation tax, the federal government will be forced to pay back the billions in tax collected. But it would benefit modest investors like the Moores, who helped create jobs and accomplished charitable goals, but were “subject to unfair tax rules,” said Boden.
“Such a ruling would be a shot across the bow for federal wealth taxes, and such taxes are currently being proposed for very wealthy individuals,” said the constitutional law expert.
But the Supreme Court seemed more inclined to uphold the tax on foreign income, staying in line with the lower court, leaving the deliberations over a “Wealth Tax” for a future date, as The Associated Press reported.
