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Tuesday, January 14, 2014

Bartlett: Eisner v. Macomber: How the Courts Constrain Tax Reform

New York Times:  How the Courts Constrain Tax Reform, by Bruce Bartlett:

Tax StoriesThe taxation of capital gains has always been among the most politically contentious elements of the tax code and will be among the most difficult to resolve when fundamental tax reform is undertaken. But it is made even more difficult by an old Supreme Court case limiting the scope of potential reform. ...

[I]n the 1921 case of Merchants Loan and Trust Co. v. Smietanka, the Supreme Court definitively ruled that capital gains were taxable under the income tax. That left the issue one for Congress to deal with henceforth.

However, one lasting judicial constraint on congressional latitude is the principle that only realized capital gains may be taxed, a legacy of the Eisner decision. [Marjorie E. Kornhauser (Tulane), The Story of Eisner v. Macomber: The Continuing Role of “Realization” in Tax Law and Policy, in Tax Stories (Paul L. Caron, ed.) (Foundation Press 2d ed. 2009).] This is important because many economists believe that a proper income tax ought to tax all capital gains annually, whether realized or not. It also creates a problem with unrealized gains at death and whether they should be taxed as if realized. ...

In short, there aren’t only political and economic barriers to implementing tax reform, but constitutional ones left over from long-ago court cases. Some theorists believe that only by adopting a pure consumption tax, and eliminating the taxation of incomes entirely, can we fully escape the problems inherent in capital gains taxation.

(Hat Tip: Mike Talbert.)

http://taxprof.typepad.com/taxprof_blog/2014/01/bartlett-.html

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