Just Taxes Blog by ITEP

SCOTUS Rejects Expansion of Trump’s Corporate Tax Cuts, Leaves Broader Tax Questions for Another Day

June 20, 2024

Today, seven of the nine justices on the U.S. Supreme Court upheld the constitutionality of a tax on offshore corporate profits that was one of the few significant revenue-raisers in the Trump tax law. If the Court had agreed with the plaintiffs in the case — as well as the many libertarian and anti-tax organizations backing them — the Trump tax law would have enriched the largest multinational corporations in America even more.

But the plaintiffs had an even more dangerous goal in this convoluted case, which was to lure the Court into blocking any future attempts by Congress to tax the wealthiest individuals more effectively. On this point, the future remains murky, with four justices explicitly supporting this anti-democratic course and most of the others remaining silent.

If there is one lesson Americans should take from this decision it is this: The Supreme Court matters, for tax fairness as for every other part of our lives. Whether or not we ever have a government that taxes billionaires as much as it taxes the rest of us will depend on how the Supreme Court rules in the future and who appoints justices to the Court.

The Court Preserved the Transition Tax on Corporate Profits Held Offshore, But Left the Future Murky for New Taxes on Billionaires

In this case, Moore v. United States, the plaintiffs are an American couple who own part of a corporation in India. They owed around $15,000 under the provision of the Trump tax law in question, and it was always clear their real goal was much broader than the $15,000 at stake for them and even broader than this tax provision.

The Moores tried to convince the Court of two things. First, they argued their offshore corporate profits being taxed under the Trump provision were not “realized” income, which is a hazy term known to tax lawyers but virtually unknown to anyone else.

Second, they argued that the power given to Congress under the Constitution to tax income (at least without limits that would make such a tax nearly unworkable) only applies to income that is realized. This was their real goal, and it arguably would mean that the federal government could not enforce proposals from President Biden and Congressional Democrats to tax billionaires’ unrealized capital gains. These unrealized capital gains are the appreciation on assets that have not been sold, and this is how billionaires like Jeff Bezos and Elon Musk have arranged to receive the vast majority of their income. While economists view unrealized gains as income, the tax code in most cases does not.

The good news for tax fairness is that the Court ruled against the plaintiffs on the first point, concluding the offshore corporate profits are realized income of a corporation owned by Americans, and nothing prevents Congress from taxing the owners on this income.

The not-so-good news is that four justices sided with the plaintiffs’ reasoning on the second point, at least in principle, that Congress can only tax income that is realized, and it is possible at least one more would join such reasoning in the future to strike down a tax on unrealized gains or a wealth tax.

The Corporate Tax Provision that SCOTUS Upheld

The Trump tax law, enacted at the end of 2017, included some revenue-raising provisions to offset a small portion of the huge tax cuts it provided. That included the Mandatory Repatriation Tax (“MRT,” “repatriation tax,” or “transition tax”) imposed on offshore profits held by American-owned foreign corporations that had never been subject to U.S. taxes. Those offshore profits were (in theory) supposed to be eventually taxed under the old rules, and the Trump tax law imposed a tax (at a low rate) on these profits to serve as a transition to the new rules, which would exempt most offshore profits from U.S. taxes.

In most cases, the foreign corporations affected by this provision are subsidiaries of big American corporations like Apple or Meta or ExxonMobil. But in some cases, the American owners of the affected foreign corporations are individuals like the Moores, the plaintiffs in this case.

If the Court had agreed with the Moores and struck down this tax, an immediate consequence could have been a significant loss of revenue. This provision was projected to raise $340 billion, and ITEP and the Roosevelt Institute identified 400 of the largest companies that could have collectively saved $271 billion.

Proposals to More Effectively Tax Billionaires Face an Uncertain Future

The Moores’ reasons for challenging the tax are clearly ideological and go far beyond the $15,000 they owed. They ultimately hoped to limit Congress to taxing a very narrow definition of income that excludes the unrealized capital gains that mostly flow to the very wealthiest individuals.

A capital gain is the increase in the value of an asset. When an asset increases in value, the owner has two options. The first option is to keep the appreciated asset, in which case the increase in value is an “unrealized” capital gain and not subject to tax. The second option is to sell the appreciated asset, in which case the increase in value is “realized” as the profit made from that sale, and this realized gain is subject to income tax (but often at a lower rate than applies to other types of income).

Unlike most regular working people, extremely wealthy individuals often arrange to receive unrealized gains income rather than income that would be taxed right away.

From 2014 through 2018, Jeff Bezos officially reported income of $4.22 billion, an enormous sum by any measure. But his true income vastly exceeded that. Over the same time, his wealth increased by $99 billion, mostly because of the appreciation of Amazon stock.

An economist would say he must have had income of at least that much during that time because his ability to spend money on whatever he wants increased by $99 billion. But under the tax rules, most of this asset appreciation constitutes capital gains that are not realized and not included in his taxable income until he sells the assets and receives the profit.

(You can find more details on proposals to tax unrealized capital gains of billionaires here.)

In the Moore case, the two dissenting justices explicitly endorsed the idea that Congress’ power to tax (at least without meeting some convoluted and nearly unworkable requirements) is mostly limited to realized income. And two of the seven justices in the majority wrote a concurring opinion that agreed with the realization argument at least in principle, even though they disagreed with the plaintiffs that it applied in this case.

The Chaos the Court Avoided

Despite the uncertainty created by the conservative justices (half of whom are Trump appointees), the ruling is a victory for a fair and sound tax system for another reason – at least for now. Legal chaos could erupt if the Court ever reinterprets the Constitution to impose a realization requirement on Congress’ taxing powers. The realization requirement that the Moores pushed the justices to impose would suggest that many, many existing tax laws that have been on the books for decades may be unconstitutional, leading to years of litigation and uncertainty and potentially the unraveling of our tax system.

Many of these provisions block obvious forms of tax avoidance. For example, interest paid on bonds is income subject to tax annually, but what happens if someone tries to avoid this tax by purchasing a bond that pays no interest until it is redeemed after several years? Can the bondholder put off paying tax for years (possibly even forever) by choosing one type of bond over another, even when the income ultimately generated is the same? The tax code has rules that prevent this kind of tax avoidance, but if the Court determines this income cannot be taxed without realization, these rules may be eventually struck down as well on the same grounds.

This outcome is still possible if the Court takes up this issue in the future, but for now, the majority has wisely avoided it.


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