Supreme Court Left the Door Open for a Wealth Tax. But It's Still a Terrible Idea.

Progressives have long imagined that vast riches could be infused into government coffers if only they could tax Americans not just on their income, but on estimates of their total wealth. Treat people as if they’d cashed in all their holdings at today’s value and make ‘em cough up a share to Uncle Sugar and politicians could just roll in the proceeds. Last month, the Supreme Court threw a lifeline to such dreamers with a decision granting the federal government broad authority to consider money that has yet to be received as taxable income. The idea of a wealth tax lives on, but so do its many flaws.

The opinion in Moore v. United States ventures deep into the weeds of the Tax Cuts and Jobs Act of 2017′s Mandatory Repatriation Tax (MRT). The MRT was a one-time tax on the undistributed income of foreign subsidiaries of U.S. corporations, with the bill sent to shareholders.

The plaintiffs argued they had “realized” no income to tax—the foreign holdings were property and were due very different treatment by the tax authorities.

The Court Sees Income Where There’s No Income

For the majority, Justice Brett M. Kavanaugh insisted “the MRT does tax realized income—namely, income realized by the corporation, KisanKraft. The MRT attributes the income of the corporation to the shareholders, and then taxes the shareholders (including the Moores) on their share of that undistributed corporate income.” That stuck the plaintiffs with a tax bill for money they never saw. It also raised concerns about the government taxing other holdings that have yet to be turned into liquid cash.

“Sixteenth Amendment ‘incomes’ include only income realized by the taxpayer,” Justice Clarence Thomas objected in his dissent. “The text and history of the Amendment make clear that it requires a distinction between ‘income’ and the ‘source’ from which that income is ‘derived.’”

He warned that “the Government is not shy about the fact that its definition of income includes things such as ‘increase in the value of a corporation’s capital assets,’ ‘increase in the value of unsold property,’ and ‘appreciation in the value of securities’” which should “require apportionment under the Direct Tax Clause”—a distinction Thomas saw the majority throwing aside despite its claims of a “narrow” ruling.

Sen. Elizabeth Warren (D–Mass.), a fan of heavy taxation, also saw the majority throwing aside such distinctions. She was almost giddy.

“Right-wing billionaires hoped an obscure legal case would blow up the tax code to avoid paying what they owe, but this effort failed at the Supreme Court,” she cheered. “The fight goes on to tax the rich, pass a wealth tax on ultra-millionaires and billionaires, and make the system more fair.”

Other commentators agreed the Supreme Court had kept the door open for a tax on wealth. But while such a tax on unrealized income might pass the current court’s scrutiny, that doesn’t make it wise.

A Tax With a History of Doing Harm

“Many developed countries have repealed their net wealth taxes in recent years,” Cristina Enache wrote for the Tax Foundation in a June report on such levies around the world. “They raise little revenue, create high administrative costs, and induce an outflow of wealthy individuals and their money. Many policymakers have also recognized that high taxes on capital and wealth damage economic growth.”

Depending on how high the tax is set, Enache cautioned, it can erase any gains people might make on their investments. “For safe investments like bonds or bank deposits, a wealth tax of 2 or 3 percent may confiscate all interest earnings, leaving no increase in savings over time.”

Worse, wealth taxes depend on government officials’ ability to accurately assess the value of fluctuating holdings in stocks, property, businesses, and the like. That’s a big ask even if you pretend that tax officials are likely to be honest in such efforts.

“The Amsterdam stock market fell by around 13pc in 2022 as inflation soared – but the tax office assumed investors generated returns of 5.5pc, and taxed them accordingly,” Charlotte Gifford wrote for The Telegraph about the administration of the Dutch wealth tax.

The Supreme Court in the Netherlands ruled that the wealth tax hits people excessively hard relative to actual earnings and that it’s unacceptably discriminatory while also violating rights to property ownership. Just weeks ago, the Dutch court revisited its ruling and found legislative efforts to fix the wealth tax inadequate. Hundreds of thousands of people are now owed refunds.

Enache examines several arguments for wealth taxes, including claims that they encourage more productive use of assets or their transfer to entrepreneurs who are better at producing value. But wealth taxes can also encourage consumption among those who fear they might as well enjoy assets now rather than have them confiscated later. They also incentivize businesses to pay large dividends while discouraging growth.

Lower Investment, Fewer Jobs, and Slower Growth

“Dividends induced by wealth taxes have meaningful economic consequences; the announcement of dividends with a higher probability of being induced by wealth taxes elicits lower stock returns, and such dividends are associated with lower levels of subsequent investment,” according to a 2023 paper in The Accounting Review.

With investment discouraged, it’s no wonder that wealth taxes are associated with lower wages, less employment, and slower economic growth. They also give productive people good reason to leave.

“One of the reasons Sweden abolished its wealth tax was because capital and high-net-worth individuals fled the country,” notes Enache.

As a result, Swedish banks set up shop in Switzerland to maintain contact with expat clients.

Switzerland, incidentally, is the only country in the world where wealth tax collection reaches one percent of GDP. Its status as a haven from greedier and less-stable regimes offsets a tax system that might induce taxpayers to flee or evade elsewhere. For most countries, it’s a lot of fuss with little payoff.

The U.S. Supreme Court kept the door open for implementation of a wealth tax. But Americans should resist efforts by fans of heavy levies to walk us through to whatever awaits us on the other side.

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Source: https://reason.com/2024/07/12/supreme-court-left-the-door-open-for-a-wealth-tax-but-its-still-a-terrible-idea/