A Tax Case That Could Upend the Code

Special Guests: Steven Rosenthal

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This week on Facing the Future, we began with a review of Moore vs. United States, a case that could have a profoundly negative effect on federal government revenues. Our guest was Steven Rosenthal, Senior Fellow at the Urban-Brookings Tax Policy Center. Later in the show, Tori Gorman, Steve Robinson and I looked at some new numbers on U.S. life expectancy and whether there may be a glimmer of hope that a government shutdown can be avoided in January.

Like many other tax professionals, Steven Rosenthal has been closely tracking the Moore case because of the broad implications it could have on how the federal government collects revenue. At issue is the constitutionality of the Mandatory Repatriation Tax (MRT), enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA). 

The Moores argue that the MRT does not fall within the scope of the 16th amendment’s power to tax income because they say they did not realize any gain. The government says realization of gain is not a constitutional requirement for a valid income tax.

Last week the US. Supreme Court heard oral arguments on the case and a decision is expected sometime next year. The factual background of the case can be found in a recent blog by Concord’s chief economist Steve Robinson.

Before getting into the legal arguments, we discussed what’s at stake for the budget. An estimate by the Tax Foundation found that a narrow ruling in favor of the Moores could cost the government $3.5 billion over 10 years, but that a broader ruling could cost from $346 billion to $5.7 trillion over 10 years. 

Rosenthal observed that, “Former Speaker Paul Ryan, Republican, who presided over the House in developing and passing the 2017 Tax Cuts and Jobs Act, said that the Court might blow up one third of our tax code, depending on how it handled this case,” 

“The case itself involves what appears to be a simple question, but has very far reaching implications. The simple question being: Can Congress tax unrealized or unreceived amounts? Can a taxpayer be forced to report as income amounts, that the taxpayer has not yet received? It happens a lot in our society and our economy, in which there are amounts from businesses and from investments that are not distributed, and we currently tax them. This case might yet undercut decades of tax rules that Congress has enacted to collect taxes on those unreceived amounts,” he said.

Rosenthal noted that he had worked on Capitol Hill for six years helping members from both parties develop and draft tax legislation “and realization or the receipt of cash or income is not a prerequisite for taxation.”

“Normally,” he explained,” taxpayers don’t pay tax until they receive cash or property but there are plenty of exceptions and those exceptions exist to close loopholes and to collect taxes in a fair and efficient manner. If Congress were limited by the U.S. Constitution to whether or not income must be received or realized, that could invalidate large parts of our tax code and prevent Congress in the future from enacting other taxes. Mainly, the taxes at risk are international taxes, business taxes like partnership taxation, and capital taxes, investment returns. Because in those areas these markets and the structures that are involved in these businesses and investments are quite complicated.”

“Listening to the arguments last week,” he said, “my takeaway is that all the parties are looking for a narrow way to decide this case without blowing up the tax code. Having said that, though, the reason the case, in my view, got to the Court was that there was an interest by a lot of conservatives in tying up Congress’s hands on taxing capital, especially future taxes on billionaires. And the question to me is, will the conservatives get the kind of opinion they want. Will the Court use the Moore case as a vehicle to tie up Congress on capital taxes. If they do, I don’t see how they can limit other reach and the damage to our code.”

Rosenthal expects that all nine Justices will be on the same side, ruling against the Moores. “The complaint about being taxed on earnings that had not been distributed, I think that will be readily dismissed. I don’t think there’s much of an argument there, and the question then arises, on what basis will it be dismissed, and will the court signal that maybe the Moores lose but future taxes on unreceived income, like some of the billionaire tax proposals out there, are suspect.”

He predicted that “It will turn out that there were earnings that were realized abroad, and those can fairly be attributed to U.S shareholders. But the question, then, is: what is the legal reasoning and the language the court uses? So, for example, suppose the Court recognizes Congress’s broad authority to tax these attributed profits. The Court could still, either in the majority opinion or a concurring opinion, say well, that’s okay for undistributed profits from a foreign corporation but you can’t tax the U.S. shareholder on unrealized appreciation on stock. That would be wrong by comparison. If the Court took that tact, Congress would be warned off of a lot of the billionaire taxes that are now pending.”

Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.

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