The Next Supreme Court Danger: Trashing One-Third of the Tax Code

Instead of worrying what the Supreme Court might say about the constitutionality of some hypothetical wealth tax that’s unlikely ever to become law—and would anyway, in my view at least, be kind of a dumb idea—I invite you to worry what the Supreme Court might say about taxing unrealized income. You should worry about that because it isn’t hypothetical at all. Paul Ryan, who was the Republican House Speaker when the 2017 tax bill passed, has been arguing strenuously against Moore because he thinks a ruling in Moore’s favor would expand the budget deficit catastrophically. “I’m not for a wealth tax,” Ryan said at a Brookings Institution event last September, “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 code.”

I leave the legal nuances to The New Republic’s Matt Ford, who wrote about Moore v. United States in September. I’m more interested in how Moore and his many supporters in this lawsuit (Landmark Legal Foundation, U.S. Chamber of Commerce, etc.) pretend no tax on unrealized income was ever conceived in the mind of man before a Republican president and a Republican Congress dreamed one up in 2017. “Until now,” said the Chamber in an amicus curiae brief, “realization has been the defining event that turns something from an asset holding value to income subject to federal tax.” A ruling in favor of taxing unrealized income, said the Landmark Legal Foundation in its amicus curiae brief, “would free Congress from nearly all constitutional restraints on the taxing power.”

Bullshit. As Ryan pointed out, Congress routinely taxed unrealized income well before 2017, and the sky did not fall. As Stephen M. Rosenthal of the nonprofit Tax Policy Center, a joint venture of the Urban Institute and Brookings, explained last fall, the first such tax dates to 1937, when Congress slapped a tax on unrealized gains from foreign personal holding companies established to dodge United States taxes. For much the same reason, Congress in 1962 slapped a tax on unrealized shareholder income in foreign subsidiaries of United States-based corporations. In 1969 Congress slapped a tax on unrealized gains from “zero-coupon bonds” that didn’t pay full interest until they matured. It did this to bring tax treatment of deducted interest in line with tax treatment of imputed interest. Taxing income not yet received was also part of a 1981 law shutting down tax straddles, a con that Treasury Secretary Don Regan was hip to because Merrill Lynch, where previously he’d been chairman, made a fortune off them. The Justice Department’s brief in opposition to Moore’s claim cites additional examples.