December 5, 2023
What is taxable income? And how far can Congress take its power to tax under the 16th Amendment.
Today the Supreme Court heard oral arguments in Moore vs. United States. And the court’s decision in this case could cause a lot of chaos in our current tax system and could significantly reduce congress’s ability to tax the super rich.
Ok – I’m going to warn you – I’m going to talk a bunch of tax stuff here and it may feel confusing – but stick with it – I’m going to explain it and more importantly I’m going to explain why the Supreme Court’s ruling here will impact you.
Moore — as in Moore vs the United States is actually two people– Charlie and Kathleen Moore who are suing the US government over almost $15,000 they were taxed. The tax stems from the 2017 Trump era tax law that required US investors in foreign companies to pay a one-time tax on accumulated foreign profits going back several decades—it’s called the mandatory repatriation tax –or MRT. The law says American taxpayers who own more than 10% of foreign corporations, even if the companies’ earnings have not been given to US shareholders – or realized — are subject to the tax. The Moores say they hadn’t realized any actual income from their investment in this India-based company so the $15,000 tax the received was bogus. They sued saying based on the 16th Amendment, congress took its taxing power too far by considering unrealized as taxable income. The couple also argues that these same 16th Amendment questions will come up again if the president and congress are successful in their attempts to create new taxes for the super wealthy.
The 16th Amendment says “the congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” Basically – the constitution says – have at it Congress. You get all the power to create and levy whatever taxes you want on anyone in any state that you want. In the past – the supreme court has rarely gotten involved in setting boundaries or rules for what counts as income and what congress considers taxable.
Now – if you’re not a corporation or wealthy investor who would be subject to this tax, why should you care? Because since 2017 the us government has collected hundreds of billions of dollars from this tax. So if the supreme court rules in favor of the Moores and says this tax went too far — all those wealthy investors and corporations will likely seek refunds to get their money back. That means hundreds of billions of dollars the government has already used or has been counting on to pay for programs for you and me — could be gone.
During the two hours of oral arguments today – Justices Alito, Gorsuch and Thomas asked questions that were very skeptical of the government’s justification for this tax. The other Justices appeared to be less critical and asked a lot of questions about how their ruling may potentially call into question other existing tax laws and how much chaos their ruling would cause to the existing tax system.
The Supreme Court will issue a ruling on this case at the end of the term in June.
