Paul L. Caron

Monday, January 30, 2023

WSJ Op-Ed: The Ninth Circuit Upholds A Wealth Tax

Wall Street Journal Op-Ed:  The Ninth Circuit Upholds a Wealth Tax, by Christopher Cox (Former Rep. (1989-2005) & SEC Chair (2005-2009)) & Hank Adler (Chapman):

The 16th Amendment authorizes the federal government only to tax income, but some members of Congress would love to tax wealth as well. That is widely understood to be unconstitutional, but a recent ruling from the Ninth U.S. Circuit Court of Appeals upholding a form of wealth tax could upend that conventional wisdom if it is allowed to stand.

The case, Moore v. U.S., involves a unique provision of the 2017 Tax Cuts and Jobs Act, which imposed a one-time retroactive tax applicable to individual U.S. shareholders of foreign corporations. Under previous law, U.S. taxpayers had to pay taxes on overseas corporate income when that income was repatriated to the U.S. in the form of dividends. The 2017 act abolished the tax on overseas income, bringing the U.S. tax system into line with those of most other developed countries. But it also created a “mandatory repatriation tax” on the corporation’s undistributed income since 1986, payable not by the corporation but its shareholders.

The result was that without selling their stock or receiving a dividend, U.S. investors were deemed to have received “income” and suddenly became liable for the new tax. ...

The ruling upends a bedrock principle of taxation, which is that to create taxable income, there must be a transaction, or “realization.” That’s what distinguishes an income tax from a tax on property or wealth. ...

Much hangs on the future of this case. If Moore is allowed to stand, Congress would have a green light to tax every U.S. investor in a domestic corporation in the same way. There would be no constitutional bar to requiring that shareholders pay income tax on their proportionate share of accumulated and undistributed earnings of every corporation in which they, or even their 401(k) plan, hold stock. ...

If the justices accept the case for review, they can finally lay to rest the notion that the 16th Amendment is based on a term with “no set definition.” What if they decline? The Ninth Circuit’s dissenters answered that question: “Divorcing income from realization opens the door to new federal taxes on other types of wealth without the constitutional requirement of apportionment.”

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