Op-Ed: A Wealth Tax Can’t Survive Constitutional Scrutiny
By Mark Demetropoulos
The Biden administration is looking to impose a new “Wealth Tax” as part its American Families Tax Plan, that seeks to tax unrealized gains and asset appreciation. It's a dangerous proposal - but thankfully it is unconstitutional.
For a Wealth Tax to pass Constitutional muster, it must properly be “apportioned” in accordance with the Sixteenth Amendment, unless it is a clear tax on income. According to the US Constitution, Section 2, Article 1, “direct taxes shall be apportioned among the several States…according to their respective numbers.
The Sixteenth Amendment (income tax amendment) eliminated the apportionment requirement for ‘taxes on incomes’ and made the modern income tax possible. However, it also left intact apportionment for all other direct taxes – ie all taxes on things other than income.
Despite Biden’s wish list, it has long been settled that “unrealized” appreciation is not “income.”
According to the US Supreme Court case of Eisner v. Macomber (1920), the increase in the value of an asset or property does not become “income,” unless and until the asset or property is sold. “Undistributed accumulated earnings and profits are not income and, therefore could not be taxed to its owners…” said the Supreme Court.
This position is summarized by tax expert and tax partner David Rivikin (a partner at Baker& Hosteler) who stated, “Taxing unrealized capital gains is not taxing income.”
The Biden staffers rely upon a two lower Court rulings:
First, was a challenge to the Trump-era “Tax Cuts & Jobs Act of 2017” (TCJA), which imposed a Mandatory Repatriation Tax - taxing US Citizens who have accumulated foreign earnings.
Two tax petitioners, Charles and Kathleen Moore challenged TCIA as a direct tax, in violation of the US Constitution, on their foreign earnings of their stock which they have not repatriated to the US.
A Federal District Court ruled against the Moores, on the reasoning that the standard of what is income should be viewed “expansively,” citing an earlier case of Murphy v. U.S. (1993), that requires “taxpayers holding certain futures contracts to recognize the gain or loss on those contracts annually, regardless of whether the taxpayer disposed of the contract during the year.”
The Moore case is currently on appeal in the US Federal Ninth Circuit Court of Appeals.
The issue of whether a tax is an “income tax” or a “direct tax” has not been fully resolved by the courts, but the Biden wealth tax most closely resembles a direct tax - and not an income tax. It would thus be unconstitutional – unless the new tax were apportioned to the states.
The process of attempting to apportion a tax is a cumbersome and exhausting process, since many states, such as Alabama, Alaska, Delaware, New Hampshire, North Dakota, Vermont and West Virginia do not currently have any billionaires: The majority of billionaires are situated in New York and California. So the tax would have to hit those states much harder.
In conclusion, this issue of taxing unrealized gains by the proposed Biden wealth tax would – if it were to pass – have to be extensively litigated in the courts. But given the prior rulings of the Supreme Court, and the plain language of the US Constitution, I wouldn’t bet on the constitutionality of any such wealth tax.