Moore v. United States and the Future of Wealth Taxes

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On December 5, 2023, the United States Supreme Court will hear arguments in a groundbreaking tax case that could have far-reaching implications on the future of wealth taxes. The case itself deals with the “Mandatory Repatriation Tax” (MRT) on controlled foreign corporations, enacted in 2017 as part of the Tax Cuts and Jobs Act. The MRT was a one-time tax on the post-1986 accumulated earnings of foreign corporations controlled by U.S. taxpayers. The petitioners in the case have asked the Supreme Court to reverse the decision of the Ninth Circuit Court of Appeals (upholding the tax) and declare it unconstitutional.

The key question before the court will be whether the 16th Amendment to the Constitution, which expressly authorized the income tax, permits the federal government to tax unrealized appreciation (the difference between the taxpayer’s basis in the asset and its fair market value) even though the taxpayer has not sold the asset to realize the gain. Direct taxes that fall outside the 16th Amendment provision on income tax are limited by Article 1, Section 4 of the Constitution to those that are fairly apportioned between the states on the basis of population.

Consequently, the decision in the Moore case ultimately will turn on whether or not the MRT qualifies as a tax on income. The petitioners argue that classifying it as an income tax goes against decades of Supreme Court precedent. The government takes the position that the MRT, which includes accumulated earnings in income and then subjects it to a one-time tax, is squarely within congressional authority to tax income.

The MRT was enacted as a way of paying for other tax cuts in the 2017 Tax Cuts and Jobs Act and was projected to generate $340 billion over 10 years (2018-2027). If the Supreme Court determines the statute is unconstitutional, there will be a hole in the federal budget, and taxpayers will not only stop paying the installments due but may pursue refund claims for tax already paid.

The implications of this case go beyond the one-time MRT, however. A ruling in favor of the taxpayer that this is a property tax and not an income tax would curtail any effort to enact a wealth tax at the federal level. Proposals like the “Ultra-Millionaire’s Tax” that seek to impose a tax on an individual’s net worth do not tax income but are intended to tax wealth. If it is not constitutional for the federal government to tax the unrealized appreciation, then taxing wealth, which includes both appreciation and underlying principal, will also be prohibited. A taxpayer victory in Moore will preclude the federal government from imposing future wealth taxes, although such taxes would remain a viable option at the state and local levels.

While some in the press have compared wealth taxes to the estate tax, there is a key distinction from a constitutional perspective. Transfer taxes are excise taxes on the transfer of assets and are characterized as a tax on the privilege of transferring assets at death or during life — unlike wealth taxes, which are a tax on simply owning assets. It is this distinction that has supported the right of the federal government to impose the estate tax since 1916, the gift tax since 1924 and the generation-skipping transfer tax since 1976. It remains to be seen whether Congress’ solution to an unconstitutional MRT will be a type of estate tax increase.

Will this challenge negate all so-called “Millionaire’s Taxes”? Not entirely. Additional taxes imposed on incomes above a stated level, such as the Massachusetts Millionaire’s Tax, provide a model for taxing high income taxpayers that clearly is constitutional. This is not a novel approach — the highest marginal income tax rates in the U.S. have historically reached over 90%.

Top Income Tax Marginal Rates

One possible Congressional response if the Supreme Court rules against the MRT would be to increase the top income tax rates. The proliferation of wealth tax proposals, however, reflects that the wealthiest taxpayers are not always the ones with the highest income tax bills. There are many obstacles to the imposition of a federal wealth tax beyond this question of constitutionality, even if the court upholds the MRT. However, if the court rules against the MRT, Congress will have to permanently shelve the possibility of a federal wealth tax.

There will be more to come on this topic, and it will be interesting to see how any decision impacts the tax proposals in the 2024 election cycle. We will provide additional commentary and analysis when the court reaches its decision, which we expect will be released in the second quarter of 2024.