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It’s difficult to concisely summarize the Supreme Court’s Thursday decision in Moore v. United States, which rejects a challenge to a one-time federal tax targeting some investors in foreign corporations. But the bottom line is that Moore is bad news for anyone hoping that the Supreme Court would launch a comprehensive attack on the federal government’s ability to raise taxes.
Nevertheless, the decision is still excellent news for billionaires.
Moore was widely viewed as a stalking horse for an attack on wealth taxes. During her 2020 presidential campaign, Sen. Elizabeth Warren (D-MA) proposed a 2 percent tax on all the accumulated wealth held by Americans worth more than $50 million. The idea was that, rather than merely taxing very wealthy individuals’ income and leaving their accumulated capital intact, a wealth tax would gradually chip away at the richest Americans’ fortunes and begin to bring wealth inequality under control.
The case produced a somewhat dizzying array of concurring and dissenting opinions. Seven justices agreed that the tax on investors in foreign corporations is constitutional, but Justice Amy Coney Barrett wrote a separate opinion, joined by Justice Samuel Alito, which suggests that Congress may have less power to tax investors in a “domestic corporation.”
Meanwhile, Justice Brett Kavanaugh’s majority opinion in Moore, which was joined by Chief Justice John Roberts and all three of the Court’s Democratic appointees, claims that it leaves the question of whether wealth taxes are constitutional unresolved. The opinion even includes a footnote stating that “our analysis today does not address … taxes on holdings, wealth, or net worth.”
But that’s not true. Kavanaugh’s Moore opinion includes a bonanza of loaded language that any competent tax lawyer can seize upon to protect their richest clients from wealth taxes, should Congress ever actually enact such a federal tax in the future.
That said, Kavanaugh’s opinion also contains some significant language that should require some of the most right-wing federal judges to roll back ambitious plans to remake US law along MAGA lines. Kavanaugh writes that the federal government’s “long settled and established” practices carry “‘great weight in’ resolving constitutional questions.” So Moore warns judges who rely on novel constitutional arguments to undermine long-existing government behavior to chill out.
Moore reads, in other words, like a political compromise, which may explain why the Court’s three Democrats join Kavanaugh’s opinion. Four of the Court’s Republicans — Justices Clarence Thomas, Alito, Neil Gorsuch, and Barrett — all joined one of two opinions that would place stricter limits on Congress’s taxing power than Kavanaugh’s majority opinion. (Thomas and Gorsuch would have struck down the tax at issue in this case.)
Kavanaugh’s opinion is fundamentally a small-c conservative decision, preserving both Congress’s ability to tax Americans in familiar ways, while seeming to cut off its ability to enact novel new forms of taxation such as a wealth tax.
So what is this case actually about?
Moore arises out of a provision of the Tax Cuts and Jobs Act (TCJA), the tax law signed in 2017 by former President Donald Trump, which imposed a one-time tax on certain investors in foreign corporations. This one-time tax was intended to offset lost revenue that would result from a broader package of corporate tax cuts contained in the TCJA.
Under this one-time tax, certain shareholders in foreign corporations must pay taxes on the corporation’s profits, even if those profits have not yet been distributed to the shareholders themselves. In Moore, for example, the plaintiffs owned stock in a foreign company that provides supplies to farmers in India. That company had earned significant income since these plaintiffs invested in it, and the TCJA required them to pay $14,729 in income taxes on the company’s income.
The question in Moore is whether it is permissible to tax a company’s owners on income that is earned by the company, but that has not actually been distributed to those owners.
Moore says that the answer to this question is “yes.” As Kavanaugh notes, the tax code is full of provisions that require business owners to pay income taxes on the business’s income. Kavanaugh also cites a long line of Supreme Court precedents, including the Court’s decision in Helvering v. National Grocery (1938), which establish that a corporate shareholder cannot “prevent Congress, if it chose to do so, from laying on him individually the tax on the year’s profits.”
So Moore is fundamentally a victory for the status quo. The Court has long held that a company’s owners may be taxed on the company’s income, and Moore does nothing to change that.
Why Moore is bad news for wealth taxes
Kavanaugh claims in a footnote that his opinion does not resolve the question of whether Congress could impose a wealth tax like the one Warren proposed in 2020. But the opinion is laden with language suggesting that such a wealth tax would be unconstitutional.
The most damaging section of the opinion, for proponents of wealth taxes, deals with an arcane distinction between “direct” and “indirect” taxes. The Constitution provides that “direct” taxes “shall be apportioned among the several States.” That means that if the state of New York makes up six percent of the US population, then exactly six percent of any direct tax imposed on the United States must be collected from New Yorkers.
As Kavanaugh notes, “that kind of complicated and politically unpalatable result has made direct taxes difficult to enact.” Neither wealth nor incomes are evenly distributed among the fifty states. So it is extremely difficult to design a direct tax that does not violate the Constitution. Indeed, Kavanaugh writes that “the parties have cited no apportioned direct taxes in the current Internal Revenue Code, and it appears that Congress has not enacted an apportioned tax since the Civil War.”
But what, exactly, is a “direct” tax? Before Moore, the answer to this question was somewhat opaque. In Pollock v. Farmers’ Loan & Trust (1895), the Court quotes a wide range of founding-era luminaries explaining what they thought a direct tax is, and their definitions are all over the map.
Kavanaugh’s Moore opinion, however, does offer a fairly concise definition. “Generally speaking,” Kavanaugh writes, “direct taxes are those taxes imposed on persons or property.” He adds that “property taxes remain direct taxes that must be apportioned.”
Meanwhile, “indirect taxes are the familiar federal taxes imposed on activities or transactions.”
So Kavanaugh appears to be drawing a rigid line between taxing wealth (what he calls “property”), and taxing the income derived from that wealth or from labor. If an investor owns $50 million worth of stock, a tax that seeks to collect a percentage of that wealth would qualify as a direct tax, while a tax on, say, the dividends produced by that stock would be an indirect income tax.
As a practical matter, that means that a Warren-style wealth tax would almost certainly be unconstitutional, because it would be nearly impossible to design such a tax in a way that complies with the apportionment requirement.
Realistically, this probably isn’t the worst blow progressives could have suffered. There were already profound practical obstacles to enacting a wealth tax, most of them arising out of the fact that it’s often very difficult to determine the value of a wealthy investor’s assets. Suppose that such an investor owns a valuable and unique work of art — a Picasso, perhaps. How is the government or the taxpayer supposed to determine the specific value of this artwork, without hiring a highly specialized art assessor to do so?
Or, for that matter, imagine a wealthy individual whose family owns a business that is not publicly traded, and whose stock has never been sold. How are tax assessors supposed to determine whether this individual’s stake in that business is worth more than $50 million, the threshold for taxation under Warren’s proposed wealth tax?
Congress has not yet enacted a wealth tax, and these practical problems probably explain at least part of the reason why. It’s relatively easy to determine how much income a particular taxpayer earned in a specific year, and to tax a percentage of that income. It’s much harder to determine many taxpayers’ precise net worth.
Still, Moore likely puts to rest any future possibility of a federal wealth tax. Given Kavanaugh’s declaration that “property” taxes cannot, as a practical matter, be enacted by Congress, Warren’s 2020 proposal is likely dead even if Democrats win enormous supermajorities in a future Congress.
