So Moore is fundamentally a victory for the status quo. The Court has long held that a company’s owners may be taxed on the company’s income, and Moore does nothing to change that.
The Supreme Court’s new tax decision is great news for billionaires
Most of the justices voted not to blow up the US tax code, but the opinion has bad news for progressive proponents of wealth taxes.
Why Moore is bad news for wealth taxes
Kavanaugh claims in a footnote that his opinion does not resolve the question of whether Congress could impose a wealth tax like the one Warren proposed in 2020. But the opinion is laden with language suggesting that such a wealth tax would be unconstitutional.
The most damaging section of the opinion, for proponents of wealth taxes, deals with an arcane distinction between “direct” and “indirect” taxes. The Constitution provides that “direct” taxes “shall be apportioned among the several States.” That means that if the state of New York makes up six percent of the US population, then exactly six percent of any direct tax imposed on the United States must be collected from New Yorkers.
As Kavanaugh notes, “that kind of complicated and politically unpalatable result has made direct taxes difficult to enact.” Neither wealth nor incomes are evenly distributed among the fifty states. So it is extremely difficult to design a direct tax that does not violate the Constitution. Indeed, Kavanaugh writes that “the parties have cited no apportioned direct taxes in the current Internal Revenue Code, and it appears that Congress has not enacted an apportioned tax since the Civil War.”
But what, exactly, is a “direct” tax? Before Moore, the answer to this question was somewhat opaque. In Pollock v. Farmers’ Loan & Trust (1895), the Court quotes a wide range of founding-era luminaries explaining what they thought a direct tax is, and their definitions are all over the map.
Kavanaugh’s Moore opinion, however, does offer a fairly concise definition. “Generally speaking,” Kavanaugh writes, “direct taxes are those taxes imposed on persons or property.” He adds that “property taxes remain direct taxes that must be apportioned.”
Meanwhile, “indirect taxes are the familiar federal taxes imposed on activities or transactions.”
So Kavanaugh appears to be drawing a rigid line between taxing wealth (what he calls “property”), and taxing the income derived from that wealth or from labor. If an investor owns $50 million worth of stock, a tax that seeks to collect a percentage of that wealth would qualify as a direct tax, while a tax on, say, the dividends produced by that stock would be an indirect income tax.
As a practical matter, that means that a Warren-style wealth tax would almost certainly be unconstitutional, because it would be nearly impossible to design such a tax in a way that complies with the apportionment requirement.
Realistically, this probably isn’t the worst blow progressives could have suffered. There were already profound practical obstacles to enacting a wealth tax, most of them arising out of the fact that it’s often very difficult to determine the value of a wealthy investor’s assets. Suppose that such an investor owns a valuable and unique work of art — a Picasso, perhaps. How is the government or the taxpayer supposed to determine the specific value of this artwork, without hiring a highly specialized art assessor to do so?
Or, for that matter, imagine a wealthy individual whose family owns a business that is not publicly traded, and whose stock has never been sold. How are tax assessors supposed to determine whether this individual’s stake in that business is worth more than $50 million, the threshold for taxation under Warren’s proposed wealth tax?
Congress has not yet enacted a wealth tax, and these practical problems probably explain at least part of the reason why. It’s relatively easy to determine how much income a particular taxpayer earned in a specific year, and to tax a percentage of that income. It’s much harder to determine many taxpayers’ precise net worth.
Still, Moore likely puts to rest any future possibility of a federal wealth tax. Given Kavanaugh’s declaration that “property” taxes cannot, as a practical matter, be enacted by Congress, Warren’s 2020 proposal is likely dead even if Democrats win enormous supermajorities in a future Congress.