Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Democrats’ attempts to impose a wealth tax on American billionaires could be shut down as a result of a Supreme Court case to be heard by justices this week, in what lawyers and accountants are calling the most important tax case in decades.
A challenge to the Trump administration’s one-off levy on offshore profits in 2018 has mushroomed into a proxy war that experts say could have profound consequences for future revenue-generating powers, and even raise questions over the legality of significant parts of the current tax code.
Petitioners Charles and Kathleen Moore, who were forced to pay almost $15,000 under the mandatory repatriation tax, sued the US government for a refund, arguing that the policy amounted to an unconstitutional raid on “unrealised” profits from an investment they had made more than a decade earlier in an Indian rural farming enterprise.
Two lower courts ruled against them, but the high court has agreed to hear the couple’s appeal. Oral arguments will be held on Tuesday.
Don Susswein, head of the partnership tax group in the Washington national tax office of the accounting firm RSM, said the case was the most important tax dispute to come before the Supreme Court in a century — or perhaps two. Proposals such as those championed by Senator Elizabeth Warren for a tax on the value of assets, and the Biden administration’s so-called billionaire’s tax on unrealised capital gains, “will be blessed or cursed depending how this case comes out”, he said.
Conservative campaigners have warned in briefs to the Supreme Court that a failure to reverse the lower courts’ decisions would be “an invitation” to enact wealth taxes.
The US Chamber of Commerce, which represents America’s largest businesses, said that if left intact, the decisions would lead to “new federal taxes on all sorts of wealth and property” where “the possibilities stretch as wide as the congressional imagination might take them”.
The Biden administration, which is responding to the Moore case, has argued in its briefs to the Supreme Court that invalidating the mandatory repatriation tax “could cost the government approximately $340 billion over the next decade” and “potentially far more” if the court were also to call into question other longstanding federal taxes.
A broad decision in the Moore case could lead to “whole parts of tax law being disrupted”, said Dave Kautter, who was assistant secretary for tax policy at the US Treasury under Donald Trump and helped draft the bill being challenged.
Congress’s ability to tax unrealised gains on securities dealers’ portfolios were among those that could be put in jeopardy, said Kautter, who is now a partner at RSM.
Gary Scanlon, principal in the Washington national tax practice at KPMG, said that a ruling could also put at risk taxes on other forms of unrealised income such as that earned through partnerships or foreign subsidiaries. “A decision for the Moores, broad or narrow, will most certainly require looking at each of those provisions,” he said.
The Biden administration claimed in its briefs that the Moores are in effect seeking to impose an “artificial and atextual limit” on Congress’ taxing powers, and that the legal issue at the heart of the case would not have any bearing on a potential wealth tax.
President Joe Biden has said his proposed billionaires’ tax, which would compel those with a net worth of more than $100mn to pay a 25 per cent levy on net changes to their wealth, would generate $440bn in revenues over the next decade. An early version of the policy was voted down in the Senate, but the bill was reintroduced by Democrats in the House of Representatives last week.
While the Supreme Court has a 6-3 conservative majority, its recent Republican appointees have sometimes crossed ideological lines to side with liberal justices.
However, the Moore case was politicised even before the scheduled arguments, with Democratic senators calling for conservative Justice Samuel Alito to recuse himself after he was interviewed for The Wall Street Journal by one of the lawyers representing the couple. Alito refused, writing in a statement that “there was nothing out of the ordinary about the interviews in question”.
While Republicans remain implacably opposed to wealth taxes, some GOP figures have lined up behind the government’s position in the case, including former Speaker of the House Paul Ryan, who was among the drafters of the mandatory repatriation tax law.
At a Brookings Institution event in September, Ryan called Moore v US a “misguided challenge” adding: “I’m not for a wealth tax, but I think if you use this as the argument to spike a wealth tax, you’re going to basically get rid of, I don’t know, a third of the tax code . . . Be careful what you ask for.”
Read the full article here
