Progressives have long dreamed of imposing a tax on wealth, and it looks as if an arcane corner of the 2017 tax reform might give them a legal opening. The Supreme Court can shut this constitutional door if it takes up a bad ruling on appeal from the Ninth Circuit Court of Appeals.
The Sixteenth Amendment revised the Constitution to allow “taxes on incomes, from whatever source derived.” The Supreme Court has long held that income is defined as money that is realized from, say, wages or the sale of a property or financial asset. It has never been defined as unrealized income, such as from an increase in the value of an asset on paper that isn’t paid out to the owner.
Enter 2017’s mandatory repatriation tax, which taxed shareholders of some foreign corporations on their retained earnings. Congress was scrambling for revenue to pay for its reduction in tax rates, and foreign companies were an easy political target. But the tax also hits unsuspecting American bystanders.
Two of them are Charles and Kathleen Moore, of Washington state, who invested in a friend’s venture to distribute farm equipment in rural India. The company reinvested earnings to distribute more proceeds in India, and the Moores received no payout. Yet they were hit with a tax bill of $14,729 under the mandatory repatriation tax.
The Moores sued the Internal Revenue Service and sought a refund on grounds that the tax is an unconstitutional levy on income. They lost in federal district court, and a panel of the Ninth Circuit Court of Appeals upheld the tax. ruling that “realization of income is not a constitutional requirement.”
The Moores also lost a request for hearing by the full Ninth Circuit. But Judge Patrick Bumatay issued a hard-hitting dissent that called out the majority decision as contrary to “ordinary meaning, history and precedent.” …
The Moores have appealed to the Supreme Court, and we hope the Justices will hear the case. The Ninth Circuit ruling controls only in its area, but if the High Court lets it stand, it will encourage Democrats in Washington, D.C., to think that they could get away with imposing a wealth tax.
No less than the Chairman of the Senate Finance Committee, Oregon’s Ron Wyden, has floated a wealth tax proposal. The Justices have a chance in Moore v. U.S. to restore the proper legal application of the income tax and avoid a constitutional clash that could do substantial economic harm.
The Wall Street Journal
