On June 20th, 2024, the US Supreme Court ruled for the government in Moore v. U.S. The issue at hand was the legality of a provision of the 2017 tax reform law called the Mandatory Repatriation Tax (MRT). The court ruled 7-2 that the MRT was legal. In separate concurring opinions, some of the justices tried to explain their votes as referring solely to the MRT, but the ruling itself opens the door to the taxation of unrealized gains – a devastating consequence, intended or otherwise.
The Mandatory Repatriation Tax was a way to bring in money to pay for the tax cuts of the Tax Cuts and Jobs Act of 2017. It enacted a one-time tax on unrealized gains to the shareholders of primarily American owned foreign corporations. It was anticipated to bring into the treasury some $300 billion over 10 years. The tax applies to shareholders of these companies, regardless as to whether they realized (took profits on) those gains or even were shareholders at the time the company earned the money on which they were being taxed.
The Congressional Budget Office estimates the ten-year cost of the 2017 Tax Cuts and Jobs Act to be $1.9 trillion. A staggering number, but not as eye-catching as $2.2 trillion. That would be the cost without the MRT. The MRT is a tax increase in a tax cut bill. It is taxing gains that are not taken. A comparison would be if the federal government decided to tax the increase on the value of your home – even though you hadn’t sold it. This Supreme Court ruling makes that a possibility.
More likely than a tax on home equity is a “wealth tax,” for which there are already proposals in congress. A “wealth tax” would impose a tax on the unrealized gains of investment account balances over a certain dollar value. The current proposal calls for a 2% tax on assets over $50 million. This includes monies in trust accounts, weakening the power, and thereby value, of holding assets in trusts in the first place. (warren,senate,gov)
The 16th Amendment to the constitution gives congress the power to tax income, from any source derived. The dissenting votes on the court focused on the word “derived” to suggest that income had to be taken (realized) to be taxable. Rather than twisting the constitution to read “income derived” instead of “sources derived,” the court should have focused on what is income. Tax law says income is money “taken.” This is the definition that would have allowed the court to rule for Moore. (irs.gov)
Other than the fact that a tax on unrealized gain is (was?) unconstitutional, such a tax on accumulated wealth creates other problems. Enforcement would be difficult, as determining fair market value of assets at a certain point in time would create discrepancies between the government and taxpayers. Avoidance would be high, and the chief manner of avoidance would simply be not to accumulate wealth beyond certain levels. This creates a disincentive to investing which is part of what drives economic growth in the country. (investopia.com)
The U.S. already has a form of unrealized gains taxation in the forms of property taxes and the estate tax. It could be argued that both are forms of double-taxation. A wealth tax would most definitely be double-taxation, and the ruling in Moore explicitly allows for this. While double taxation is not illegal, it is not a policy the US should be openly espousing, if for nothing other than the sheer political ramifications.
By letting the Mandatory Repatriation Tax stand, the high court did a disservice to the rule of law as it pertains to taxes in America. It did what its concurring opinion writers say it didn’t, the taxing of unrealized gains. The justices admit as much, but then they try to say that by explicitly allowing this illegal tax, they are not opening the door to other such taxing mechanisms.
It is not hyperbole to suggest that such tax increases are on the horizon based upon this case. Senator Elizabeth Warren, the architect of the 2% tax on assets over $50 million, recently suggested that it would be worth increasing taxes on middle- and lower-income families, by allowing all of the 2017 tax law to expire next year, if congress cannot pass her unrealized gains tax. In fact, the congress is preparing to tackle the expiration of the law by trying to wholly revamp the tax code. According to Senator Mark Warner, “This is going to be Tax Armageddon.” (wsj.com)
Great 4th article Rory!