Supreme Court Hears Arguments That Could Change American Taxation System
The Supreme Court witnessed a crucial moment on Dec. 5, as it heard oral arguments in a tax case that may have far-reaching effects on how the United States taxes income. The case may also determine whether the accumulation of wealth in assets is considered income.
The case sprouts from a provision in the 2017 Tax Cuts and Jobs Act (TCJA) that converted the U.S. tax system from a worldwide one to a territorial system, which taxes only U.S. source income. Shareholders of foreign corporations were treated as though their respective share of the corporation’s accumulated profits were considered “income,” even if the profits had not been remitted as a dividend.
The new system imposed a relatively low one-time tax on unremitted accumulated profits, known as the Mandatory Repatriation Tax (MRT). Charles and Kathleen Moore, shareholders of a foreign corporation, were subjected to tax under this new process. They challenged this, claiming that the value of their shares was not “income.” In particular, left-leaning progressives, led by Senator Elizabeth Warren, are hoping this case will establish a precedence for taxing accumulated wealth. The New York Times even printed an op-ed titled “Want to Tax the Rich for Real? Pay Attention to This Supreme Court Case,” emphasizing the significance of the case in terms of taxing property appreciation.
This case puts to the test the 16th Amendment which gave Congress the power to lay and collect taxes on incomes. What constitutes income has been defined through various cases, making the argument of the Moores primarily about whether accreted value should be considered income for tax purposes.
Economist and philosopher Adam Smith, a strong influence on the Founding Fathers, underscored the importance of imposing taxes according to specific principles to protect the well-being of individuals and maintain the efficiency of the tax system. Implementing a tax on the appreciation of value contradicts these principles and would lower the standard of living for many Americans, particularly those with accumulated and appreciated assets.
During the oral argument at the Supreme Court, there were concerns raised about the interpretation of this case which could pave the way for Congress to introduce a wealth tax. While the government and some liberal justices cited various long-settled elements of tax law to justify imposing taxes on unremitted profits, the conservative justices cast doubts on the potential consequences of such a move, especially with the backdrop of issuing a wealth tax.
It is anticipated that the court won’t issue an opinion on the Moore case until next summer. If the Suprerme Court supports the MRT, it may be on narrow grounds. The US Senator Warren and her associates may have to wait and win some public support before they can actually realize their goal of taxing wealth, or specifically, accreted value of assets.
In conclusion, the future of the American tax system now rests in the hands of the Supreme Court. The outcome of this case may pivot on the interpretation of income and wealth, with potential implications for the taxation of assets and wealth in the country.
