Supreme Court’s potential limits on Biden administration

The Supreme Court’s Potential Impact on Biden’s Tax Plans

The Supreme Court isn’t finished causing problems for the Biden administration. After dealing the administration a major blow by deeming President Joe Biden’s $430 billion student debt transfer illegal, the court could soon upset his plans to tax the rich.

The Consequential Case: Moore v. United States

The court will hear cases this fall pertaining to gun rights, federal agency power, and whether “Trump too small” can be trademarked, but the most consequential case for Biden may be Moore v. United States. That case has to do with whether Biden can levy a wealth tax, something he’s prominently and repeatedly called for.

“Reward work, not just wealth. Pass my proposal for a billionaire minimum tax,” Biden said during the State of the Union address. “Because no billionaire should pay a lower tax rate than a school teacher or a firefighter.”

Biden later proposed a 25% annual tax on all gains to wealth in excess of $100 million in a given year, including unrealized capital gains which aren’t currently taxable. The White House says that the tax would only apply to the top 0.01% of the highest earners.

While the proposal faces long odds with a Republican-controlled House of Representatives, it could be nixed permanently if the high court rules such a tax is unconstitutional.

The Moore Case and Taxation

The specifics of the Moore case don’t involve huge amounts of money, but center around the same issues of taxation and the definition of the word “income.”

Charles and Kathleen Moore, a Washington state-based couple, made a nearly $40,000 investment into an Indian company in 2005, and never received any money or other payments from the company even though it made a profit every year.

Under the 2017 tax reform law, they learned that they were subjected to a mandatory repatriation tax of $14,729. They paid that amount and then filed suit seeking a refund and claiming that the tax violates the constitution’s apportionment clause.

The Sixteenth Amendment authorizes Congress to “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states.” That means that the federal government cannot tax stock gains, which are the source of wealth for many billionaires, unless those stocks are sold.

Progressive leaders have for years railed against this state of affairs, with Sens. Bernie Sanders (I-VT), Elizabeth Warren (D-MA), and Finance Committee Chairman Ron Wyden (D-OR) supporting a tax on wealth itself rather than direct income.

An appeals court ruled that the Moores could be taxed this way, saying “there is no constitutional prohibition against Congress attributing a corporation’s income pro-rata to its shareholder.” But the Supreme Court could reverse that ruling, rendering the repatriation tax and future wealth-based taxes off-limits at the federal level.

“The Sixteenth Amendment allows the federal government to impose income taxes without apportioning them among the states,” said Cato Institute research fellow Thomas Berry. “But courts have always limited those taxes to that word, ‘income,’ and said that word is meaningful. It doesn’t just mean whatever the government wants it to mean.”

The Cato Institute is one of several organizations to file amicus briefs on the Moores’ behalf, along with the Chamber of Commerce and Americans for Tax Reform. Hearings are likely to begin in October.

Whether unrealized capital gains can be considered income has long been a subject of debate among scholars. Berry suggests that Biden and other Democrats could instead try to raise taxes on traditional income, which he is also seeking to do, as well as through measures such as tariffs on foreign goods.

Biden mentions the billionaire tax idea frequently in speeches and has claimed that billionaires pay as low as 3% in taxes on average, claiming the super-rich pay a lower percentage of their income than middle-class workers.

Yet that idea may be ruled out well ahead of any implementation depending on what the court decides.

“You can never predict for certain,” Berry said, “but I think the justices will be concerned about setting a new precedent here and opening the door to a lot of taxes that we’ve never seen before at the federal level.”

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