The Stealth Attack on the Power to Tax

[Celerity]

The Supreme Court could overturn a well-established form of federal taxation.

https://prospect.org/justice/2023-09-12-stealth-attack-power-to-tax/



The Supreme Court has accepted a sleeper case for review that could cost the Treasury seven trillion dollars over a decade if the justices agree with the most extreme constitutional claims about limiting the government’s power to tax. This is the latest front in the war to kill the modern administrative state by “starving the beast” for revenue. The case, Moore v. U.S., challenges one of the few provisions in Trump’s massive 2017 tax cuts for the rich that actually collected revenue to offset some of the losses. The offset provision, known as the Mandatory Repatriation Tax, ended the unlimited deferral of foreign earnings from U.S. taxation when investors or corporations kept profits offshore.

At the time, tax avoidance schemes had accumulated about $2 trillion outside the U.S. With the closing of this loophole. the Joint Committee on Taxation (JCT) estimated that this new provision would increase federal revenues by $338 billion in the ten fiscal years from 2018 to 2027. Here’s the rub. The tax applies whether or not the earnings are actually distributed to the investor. But the question of whether unrealized gains can be taxed has been a gray area of tax law. The premise that they should not be taxed is the basis for the capital gains loophole, which allows tax to be deferred indefinitely as long as the stock is not cashed in. In the case that the Court accepted for review, Charles and Kathleen Moore had made a modest investment in a friend’s company in India. The retained earnings were left in India. Nonetheless, the IRS taxed them $14,729 as the tax on their share of the profits.



The Moores sued. Their suit cited a 1920 Supreme Court case, Eisner v. Macomber, in which the Court held that a gain in asset value qualifies as income only if it is “received or drawn” by the investor. Their suit was rejected by both the U.S. District Court and the U.S. Court of Appeals for the Ninth Circuit as being without merit because of long-standing tax collection practices that have been accepted by the courts. But in June, the Supreme Court took the case for review, in an unsigned opinion. According to the Tax Foundation, if the Court strikes down the foreign repatriation provision, that would cost the government about $346 billion over the next decade. And there are other gray areas. For instance, many partnerships leave income earned by the partnership in the firm, but current practice deems it taxable income.

Also, if the Court were to hold that the Corporate Alternative Minimum Tax, which was just passed in a new form in the Inflation Reduction Act, is an unconstitutional tax on unrealized income, that would reduce government revenues by another estimated $247.8 billion over a decade. The Court might also strike down other taxes that apply to foreign earnings, such as the regime known as Global Intangible Low-Taxed Income (GILTI), with a revenue loss of another $352 billion. And in the most extreme case, the Court could disallow all taxes on unrealized pass-through income and corporate retained earnings. The cost of that: $5.7 trillion over ten years, or almost $600 billion a year.

snip