Tax case is defining moment for Supreme Court

OPINION:

Early this month, the Supreme Court heard arguments on one of the most important tax cases to arise in many years.

What is at stake, as is so often true of these high-profile cases, is whether the court, Congress and the executive branch will follow the Constitution or do what they, in their great wisdom, think will work better than what the nation’s governing document requires.

The specific question before the court in Moore v. United States is whether Congress may tax increases in the value of things people own, even if the owner is merely holding the property and does not realize any payment from anyone for the use of it, as through sale or rental.

The suit was brought by a married couple in the state of Washington who had an ownership stake in a company based in India. The 2017 Tax Cuts and Jobs Act placed a one-time tax on people who owned at least 10% of a foreign company that made profits that had not been repatriated to the United States.

The Moores got hit with a $14,729 tax bill for those profits, even though they did not receive any money from the company. They argue that the Constitution does not allow the government to tax them for profits they never received. They want their money back.

A decision in favor of the Moores could invalidate many other federal taxes. The federal government taxes many forms of income that an individual does not directly receive as payments. Those taxes will be subject to challenge if the court rules income must be clearly realized in the form of a payment before Congress may tax it.

That’s an important consideration for the federal government, yet it should not enter the court’s deliberations at all. Retaining an unconstitutional principle because Congress has relied on it for decades is not a justifiable position. Continuation of multiple wrongs does not make them right.

The definition of the term income is central to this issue. The 16th Amendment gives Congress the “power to lay and collect taxes on incomes, from whatever source derived.” We generally think of income as wealth coming to a person or other entity. That’s simple and reasonable. Income constitutes an increase in wealth.

That does not mean, however, that every increase in wealth is income, especially when considered in practical terms. If you have a gold wedding ring and the price of gold rises, your wealth has increased. But all you have is your wedding ring, precious as it may be to you. You have not received any income through this passive increase in your wealth. It would be wrong for the government to tax you on it.

If you sell the ring, however, for more than what you paid for it, you realize a net increase in your wealth. That is income. The government could choose to tax that.

When the value of the company in which the Moores had part ownership increased, all the Moores had was the same share of the company. They might have been able to get a bigger bank loan at a lower rate with those shares as collateral, but the ability to borrow money is not a reasonable definition of income.

The Moores seem to have a strong case. Most of the justices, however, are clearly worried about the potential consequences of a sensible decision to end taxation of unrealized increases in the value of property.

During oral arguments, Justice Neil Gorsuch said he found an argument by the government “troubling” because it “opened the door to taxing ‘millions of Americans who hold small amounts of stock in their retirement investment accounts,’” The Wall Street Journal reported.

Solicitor General Elizabeth Prelogar dismissed that concern by saying Congress has never tried to impose such taxes and was unlikely to do so. Justice Brett Kavanaugh agreed. “‘Members of Congress want to get re-elected,’ he said. ‘That’s why [those concerns] are far-fetched,’” the Journal reported.

Such matters are none of the justices’ business, if I may be so bold as to say so. Their job in these cases (if you believe in judicial review) is to ensure that the legislative and executive branches and lower courts operate under the strictures of the Constitution. That is enough for any nine people to take on.

Deciding what the nation’s tax code should look like is the job of Congress. The court’s duty is to make sure only that Congress operates within its authority when it passes legislation.

The task before the Supreme Court in Moore v. United States is clear: One, properly define income, and two, require the government to prove that something is income before Congress may tax it. Then, stop.

• S.T. Karnick is a senior fellow and director of publications for the Heartland Institute, where he edits the Heartland Daily News and writes the Life, Liberty, Property e-newsletter.