The Supreme Court’s Next Gift For Its Billionaire Benefactors
Members of the Supreme Court sit for a new group portrait on Oct. 7, 2022. (AP Photo/J. Scott Applewhite)
After a nudge from billionaires’ think tank, justices agreed to hear a case designed to preemptively block a wealth tax.
by Andrew Perez, Julia Rock & Rebecca Burns
The Supreme Court just agreed to hear a case next term that could preempt Congress and the Biden administration from instituting a federal wealth tax — another potentially lucrative gift for conservative justices’ billionaire benefactors and the super rich. A think tank affiliated with some of those benefactors recently pressed the court to accept the case and outlaw such taxes.
Days after the high court accepted the case, President Joe Biden reiterated his opposition to progressives’ demand that he add justices to the panel, which has a 6-3 conservative supermajority.
“If we start the process of trying to expand the court, we’re going to politicize it — maybe forever — in a way that is not healthy, that you can’t get back,” he declared.
The new case, Moore v. United States, is tailored to try to block Democrats’ promised agenda by defining what can — and cannot — count as taxable “income” under the Constitution. It specifically challenges a one-time levy on some shareholders for their foreign corporate earnings that was included in the 2017 Republican tax law.
The plaintiffs are a Washington state couple who faced a $15,000 tax bill under that provision for a stake they owned in an Indian company. They argue that their corporate earnings should not count as taxable income under the Constitution because they had not been distributed to shareholders as dividends.
Tax law experts told The Lever that the petitioners' narrow definition of "income" misreads the historical record — and pointed to several past examples of Congress enacting similar taxes.
The real goal of the case is “to slam shut the door on a federal wealth tax,” as the couple’s lawyers wrote in a 2021 column. The couple’s petition to the Supreme Court expressly decries previous wealth tax proposals from Democrats, including Biden, and urges the justices to “head off a major constitutional clash down the line.”
A host of powerful interests, including the nation’s top business lobby, pressed the Supreme Court to take up Moore. So did a conservative think tank with financial ties to two of the central names in the Supreme Court’s recent ethics scandals: Elliott Management hedge fund chief Paul Singer and Texas real estate magnate Harlan Crow. Both billionaires could benefit if Supreme Court justices were to preemptively declare that taxes on wealth are unconstitutional.
“If the Republicans on the Supreme Court take the petitioners’ side, they’d be handing a massive windfall to multinational corporations and could potentially lock in a right for billionaires to opt out of paying anything remotely close to a fair share in taxes,” said Sen. Ron Wyden (D-Ore.) in a statement.
Biden and Wyden have each pitched their own versions of wealth taxes on billionaires’ unrealized gains. Their proposals could face additional legal hurdles if the Supreme Court sides with the Moore petitioners.
“A Clean And Timely Vehicle” For SCOTUS
The Supreme Court case in question deals with the treatment of Charles and Kathleen Moore’s foreign investments under President Donald Trump’s 2017 tax bill. In 2006, the Moores invested $40,000 to help launch an Indian farm equipment manufacturer, KisanKraft, and received an equity stake in the company. The firm quickly became profitable, but the Moores, as shareholders, never paid a tax on those profits until the 2017 Republican tax law.
That law imposed a new, one-time tax on the income of multinational corporations, whose foreign earnings had previously only been taxed upon being distributed to U.S. shareholders.
The purpose of this “mandatory repatriation tax” was to tap more than $2.5 trillion in undistributed earnings of U.S. corporations through foreign subsidiaries — and raise a projected $340 billion over a decade, a key revenue booster in a tax law that overall greatly increased the deficit by cutting income tax rates on corporations and the wealthy.
Since the Moores owned a substantial stake in KisanKraft, they were taxed on a portion of the company’s income and ended up with a $15,000 tax bill.
They sued, arguing that the tax was unconstitutional because even though KisanKraft had made money, it hadn’t yet been paid out to them.
While the 16th Amendment allows the federal government to levy income taxes, the lawsuit claims that it does not permit taxes like the one the Moores paid — because, they claim, the undistributed profits counted as “unrealized gains,” and cannot be considered taxable income.
The case was dismissed by a federal district court in Washington state, and the Ninth Circuit Court of Appeals upheld the district court decision.
In their February petition asking the Supreme Court to hear the case, the Moores argue it provides “a clean and timely vehicle” for the court to establish that gains must be “realized” — meaning the underlying asset is sold — in order to be subject to federal taxes. The 2017 law, they claim, “taxes them on ownership of personal property (their KisanKraft shares), not on income they had realized.”
But the idea that income must be “realized” in order to be taxable is not rooted in history or the Constitution, argued tax law experts John Brooks, a professor at Fordham University School of Law, and David Gamage, a professor at Indiana University Maurer School of Law, in a recent paper.
The two scholars reviewed the definitions of income cited by judges in the lower court decisions, the Moore plaintiffs, the amicus briefs in the case, and definitions of income at the time the 16th Amendment was ratified, and found that “none of the definitions… includes the words ‘realize’ or ‘realization.’”
“Realization is explicitly not part of the definition of income,” Brooks told The Lever.
Brooks added that realization isn’t really the issue in the Moore case, because the company, KisanKraft realized the income.
“It is real earnings, not just fluctuation in asset values,” Brooks said.
Moreover, as Brooks and Gamage point out in their paper, Congress has on various occasions — including in 1864 and 1913 — taxed shareholders for undistributed corporate income.
Billionaires’ Think Tanks Boosting The Case
While the Moore case takes aim at a one-time tax on foreign income, the Supreme Court’s ruling could make it harder to design a wealth tax that can survive legal challenges.