At the end of June the Supreme Court agreed to hear what is likely the most important tax case in decades: Moore vs. United States. It’s a case that seems obscure but that will have enormous future consequences regarding the ability of Congress to levy taxes.
The 2017 Tax Cuts and Jobs Act (TCJA), crafted by a Republican Congress and signed into law by President Trump, included many reforms long-wanted by pro-growth conservatives. It also attempted to solve some long-standing problems with international taxation, including the problem of “stranded” overseas profits. U.S. companies were holding literally trillions of dollars of profits in overseas subsidiaries because repatriating those profits would subject them to double taxation (taxed locally and then again when the monies were brought back to the U.S.).
The TCJA’s unfortunate solution to this problem was to “deem” those overseas profits as having already been realized (even though they hadn’t been) and tax at a lower, more favorable rate. This provision raised eyebrows here at the Institute for Policy Innovation (IPI) and other policy research institutions because it seemed a clear overreach of the legislative branch’s power to tax.
But it caused practical harms as well. Charles and Kathleen Moore had invested in a business in India that helped low-income farmers obtain modern farming tools. The Moores did this at least in part for charitable purposes, reinvesting all of their profits in the company and never making a dime from their investment.
But because of the “deemed income” provision in the TCJA, the Moores received a gigantic tax bill, retroactive to 1986.
For the last 100 years of tax law, the courts have held that taxpayers cannot be taxed on the appreciated value of an asset or investment until they sell the asset or realize the income. That is what triggers a taxable event, not theoretical or paper appreciation or profit. The TCJA upends this long understanding, with immediate harms to the Moore family, and with huge potential future implications.
Imagine if Congress could tax you, now, on the increase in your home’s value, or on the paper profits on your investments? How about on the increase in value of a business you own?
You don’t have to imagine very hard, because that is EXACTLY what Elizabeth Warren and Bernie Sanders want to do through their “wealth tax” proposals. Tax wealth, not simply income. And not the income realized from assets and investments, but the assets and investments themselves.
Thankfully, the Supreme Court has agreed to hear the Moore’s appeal. But we all have much at stake in the outcome. A finding against the Moores will open the floodgate for Congress and the states to tax virtually any asset by deeming it as income.
July 19, 2023