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?
The power of Congress to levy taxes rests on two provisions of the US Constitution. Under Article I, Section 9, Congress can impose certain taxes, but only “in Proportion to the Census of Enumeration.” The Sixteenth Amendment, adopted in 1913, created an exception for income taxes “without apportionment among the several States, and without regard to any census or enumeration.”
The Moores argued that because the accumulated income subject to the MRT had not been distributed, it was not realized, and thus did not qualify as income under the Sixteenth Amendment. Therefore, they contended, the MRT should be apportioned among the states according to their population, rather than apportioned to individuals based on their income. The court, largely relying on precedent, disagreed.
What does this have to do with a wealth tax?
Consider: If a wealth tax does not qualify as an income tax under the Sixteenth Amendment, then it must be proportioned among the states according to the census. In other words, the amount due from each state must be (roughly) in line with that state’s proportion of the US population.
To see what this means in practice, consider Connecticut, where I live and work. At the time of the 2020 census, some 1.1% of all the people in the country lived in Connecticut. If the rule of proportionality applies, the state’s residents, combined, could be assessed at most a smidgen more than 1% of a federal wealth tax. Yet according to Statista, some 9.4% of Connecticut households have net worths in the seven figures, the third highest rate in the country.
So, does Justice Brett Kavanaugh’s majority opinion give us any hints on where the court might come out should the issue arise? A few — but they’re just hints.
First, the principal argument against a wealth tax has long been that it is unconstitutional to tax unrealized income without apportionment. The court insisted that it was reserving that question for another day. But the majority goes out of its way to warn that a ruling for the Moores might doom such longstanding levies as the gift tax, and such newfangled rules as the pass-through tax on global intangible low-taxed income.
The result, declared the majority, would be fiscal disaster: “[T]hose tax provisions, if suddenly eliminated, would deprive the US Government and the American people of trillions in lost tax revenue.” About this possibility, Justice Kavanaugh sounds the alarm: “The Constitution does not require fiscal calamity.”
A hint that the justices might care how much revenue is raised? Maybe.
Second, opponents have long contended that a wealth tax would amount in many cases to double taxation. In Moore, the majority was careful to note that, at least with respect to undistributed corporate income, double taxation is off the table: “[N]othing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity.”
Finally, let’s consider the separate opinions. Justice Ketanji Brown Jackson’s concurrence leaves little doubt on where she stands: “[T]here is no constitutional requirement ... that a taxpayer ‘be able to sever ... the gain from his original capital’ in order to be taxed on it.” Jackson concludes that the requirement that income be realized before it can be taxed is not a constitutional rule but “founded on administrative convenience.”
But four other justices — Justice Amy Coney Barrett in a concurrence joined by Justice Samuel Alito, and Justice Clarence Thomas in a dissent joined by Justice Neil Gorsuch — seem quite clearly of the view that the Sixteenth Amendment exception applies only to realized income. Should they be presented with a wealth tax, all four would likely hold that it must be apportioned among the states. That would mean that Georgia, with roughly three times the population of Connecticut, would have to pay three times as much in wealth taxes, even though there’s much more wealth in Connecticut.
Maybe searching Supreme Court opinions for trails of breadcrumbs with which to predict how justices will vote in other cases seems like a fool’s errand. Or maybe that’s exactly why written opinions are useful.
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