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While lawmakers have a growing interest in taxing the ultra-rich, last week's Supreme Court ruling could threaten future wealth tax proposals, experts say.
In Moore v. United States, the Supreme Court ruled a challenge blocked to the “mandatory repatriation tax,” a one-off levy on certain foreign investments introduced in 2017.
The case involved an American couple who were required to pay approximately $15,000 in taxes on undistributed profits from a company abroad. The Moores argued that the levy was in breach of the 16th Amendment because they did not 'realize' or receive any income.
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Many tax experts looked to the Moore case to gauge Congress’s authority to tax unrealized income, which could impact wealth tax proposals. But the Supreme Court did not comment directly on the issue.
“Nothing in it this opinion “Should be read as authorizing a hypothetical attempt by Congress to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity,” Justice Brett Kavanaugh wrote in his majority opinion.
Still, the 83-page ruling did provide some clues about whether certain versions of a wealth tax might pass constitutional muster, experts said.
Problems with wealth tax proposals
In their concurring and dissenting opinions, four justices—Amy Coney Barrett, Samuel Alito, Clarence Thomas and Neil Gorsuch—said the 16th Amendment requires realization of taxes. One more justice could create a majority in future cases.
That could be an obstacle for Biden's billionaires tax, which calls for a 25% tax on unrealized profits for households with wealth over $100 million, experts say. Biden also included a billionaires tax in his 2023 and 2024 budget proposals, but the plan failed to gain widespread support.
No billionaire should pay a lower federal tax rate than a teacher, a sanitation worker or a nurse.
“No billionaire should pay a lower federal tax rate than a teacher, a sanitation worker or a nurse,” Biden said during the State of the Union, where he renewed his proposal. He also briefly mentioned the plan during the first presidential debate on Thursday.
But the Supreme Court rulings and Biden's proposal “seem likely to be on a collision course,” said Alan Cole, chief economist at the Tax Foundation's Center for Federal Tax Policy.
Of course, the future of Biden's tax proposal is unclear, with control of Congress uncertain.
Plans 'on the wrong side of the constitutional line'
Federal wealth taxes captured national attention during the 2020 presidential primaries when Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., introduced competing proposals. Senate Finance Committee Chairman Ron Wyden, D-Ore., has also proposed a similar tax on billionaires.
The question is whether wealth tax proposals count as a 'direct tax' must be distributedor apportioned among the fifty states according to their percentage of the total United States population, according to the Constitution.
That's a barrier because “there are never any taxes raised,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “It's impossible.”
During oral arguments in the Moore case in December, Attorney General Elizabeth Prelogar said a wealth tax should be distributed among the states, which Rosenthal said “essentially threw the Warren and Sanders wealth taxes under the bus.”
Moreover, Kavanaugh's majority opinion, in which he “analytically distinguishes between direct and indirect taxes” and references Prelogar's comment, could place Warren's and Sanders' wealth tax proposals “on the wrong side of the constitutional line,” Rosenthal said.
Experts say it's not clear whether the Biden and Wyden proposals, which would use so-called mark-to-market, or annual, capital gains taxes, are constitutional.
Wyden has maintained that his plan is constitutional because annually taxing capital gains is already part of the tax code.
The Supreme Court ruling “will open the floodgates to many more lawsuits,” Rosenthal added.
