Is a Wealth Tax an Income Tax? Here's Why That Matters

Moore v. United States, Thursday’s decision by the US Supreme Court on the Mandatory Repatriation Tax, would seem to affect relatively few taxpayers. But in rejecting a constitutional challenge to the MRT (as it’s known), the justices might have scattered some breadcrumbs about their attitudes toward a potentially more sweeping wealth tax.

The MRT was adopted in 2017 as part of the Tax Cuts and Jobs Act. The tax code has long treated passive income earned by “American-controlled foreign corporations” as attributable to US shareholders even if the income has never been distributed. The MRT imposed a one-time tax on other income accumulated in the corporation and not distributed, including active business income, going back several years.

Critics immediately charged that the MRT was unconstitutional, and it was clear from the first that the issue was bound for the Supreme Court. The statute sparked such fierce debate not because many people care about how to account for undistributed overseas active business income, but because the answer was likely to have a lasting effect on the federal government’s taxation power.

The lawsuit in question was brought by Charles and Kathleen Moore, whose $40,000 investment in an American-owned foreign corporation in 2006 had by 2017 generated over $500,000 in income accumulated but not distributed. They paid $14,729 in taxes under the MRT and sued for a refund. That was the claim the court rejected.

OK, as I said: Few people will be affected. Yet Daniel J. Hemel, one of the nation’s leading tax scholars, was right when he wrote last year, “[F]or almost everyone except the Moores themselves, the outcome in the case matters less than the reasoning that the justices embrace.”

Why is the reasoning so important?