What the SCOTUS Decision Means for a Federal Wealth Tax

A Supreme Court decision in the case Moore v. United States was widely seen as a test for the constitutionality of a potential federal wealth tax. The dispute challenged Congress’s authority to tax American shareholders on certain foreign corporate earnings, raising fundamental questions about what constitutes “income” under the U.S. Constitution. The case confronted long-standing principles of taxation, and the outcome was anticipated to either open the door for more expansive forms of taxation or erect a constitutional barrier against them. The Court’s decision offers a glimpse into the evolving interpretation of Congress’s taxing power and sets the stage for future debates over economic policy and wealth distribution.

The Mandatory Repatriation Tax at Issue

The legal challenge in Moore v. United States centered on a provision of the Tax Cuts and Jobs Act of 2017 (TCJA), known as the Mandatory Repatriation Tax (MRT). This one-time tax, under Section 965 of the Internal Revenue Code, addressed offshore profits held by foreign corporations with substantial U.S. ownership. Before the TCJA, U.S. corporations could defer taxes on profits from foreign subsidiaries until the money was repatriated, but the MRT altered this by deeming those foreign earnings to be repatriated, subjecting them to immediate taxation.

The tax was levied on U.S. shareholders owning 10% or more of a controlled foreign corporation (CFC), which is a foreign entity where U.S. shareholders own more than 50% of the stock. The MRT applied to the shareholder’s portion of the corporation’s post-1986 undistributed earnings. The law set a two-tiered rate: 15.5% for earnings held as cash and 8% for earnings reinvested in the business. Taxpayers could also pay the liability in installments over eight years.

The plaintiffs in the case, Charles and Kathleen Moore, were U.S. investors who held an approximate 13% stake in a CFC called KisanKraft, a company based in India that supplied equipment to small-scale farmers. From its inception in 2006 through 2017, KisanKraft was profitable but reinvested all its earnings back into the company’s growth and did not distribute any dividends to its shareholders. Following the enactment of the TCJA, the Moores were assessed a tax liability of $14,729 based on their share of KisanKraft’s retained earnings, even though they had never personally received any of that money.

This situation formed the basis of their legal argument. The Moores contended the MRT was unconstitutional because it taxed them on property—their shares—rather than on income. Their argument hinged on “realization,” a principle that income must be tangibly received by a taxpayer before it can be taxed under the Sixteenth Amendment. Because KisanKraft’s profits were never distributed, they argued they had not “realized” any income and the MRT was a direct tax on property that must be apportioned among the states by population, a requirement it did not meet.

The Supreme Court’s Majority Opinion

In a 7-2 decision, the Supreme Court upheld the Mandatory Repatriation Tax. The majority opinion, authored by Justice Brett Kavanaugh, was narrow and focused specifically on the facts of the case. The Court classified the MRT as a tax on income realized by the corporation and attributed to the shareholders, not an unconstitutional direct tax on property. The opinion explicitly stated the decision did not resolve the debate over a wealth tax, a tax on asset appreciation, or other hypothetical taxes not before the court.

The core of the majority’s reasoning was that Congress has long-standing authority to tax American shareholders on the undistributed income of entities they own. The opinion drew parallels between the MRT and other existing tax regimes, such as those governing partnerships and S corporations, where income is taxed at the owner level regardless of whether it has been distributed. The Court found that from a constitutional perspective, there was no meaningful distinction between these established forms of pass-through taxation and the MRT’s treatment of U.S. shareholders of controlled foreign corporations.

Justice Kavanaugh emphasized that the income subject to the MRT was realized by the foreign corporation, KisanKraft. The decision rested on the principle that Congress can attribute a closely held corporation’s income to its shareholders and then tax them on it. The Court’s precedents confirm that Congress may tax either the entity or its owners.

Concurring and Dissenting Opinions

Barrett’s Concurrence

Justice Amy Coney Barrett, joined by Justice Samuel Alito, filed a concurring opinion that agreed with the judgment to uphold the tax but disagreed with the majority’s reasoning. Her concurrence focused on the historical understanding of the Sixteenth Amendment and realization. She suggested that the history surrounding the amendment’s adoption provides a clearer path to resolving the case. Justice Barrett’s opinion suggested a strong historical basis for a realization requirement, but she did not believe the MRT violated it because the income was realized by the corporation, KisanKraft.

Jackson’s Concurrence

Justice Ketanji Brown Jackson’s concurring opinion offered a different reason for upholding the tax. She argued the MRT did not need to be classified as an income tax under the Sixteenth Amendment to be constitutional. In her view, the MRT could be seen as an excise tax on the privilege of conducting business through a foreign corporation. This approach would sidestep the debate over realization, as an excise tax is not subject to the apportionment requirement for direct taxes.

Thomas’s Dissent

Justice Clarence Thomas, joined by Justice Neil Gorsuch, authored a dissent arguing the Sixteenth Amendment contains a clear realization requirement, meaning income must be received by the taxpayer before it can be taxed without apportionment. In his view, the Moores had no “income” to tax because they never received any money from their investment in KisanKraft, a separate legal entity. Justice Thomas contended the majority’s decision to attribute the corporation’s income to the shareholders breaks from over a century of precedent. The dissent warned that by upholding the MRT, the majority was opening the door to a host of other taxes on unrealized gains.

The Aftermath for a Potential Wealth Tax

The Supreme Court’s decision in Moore left the question of a federal wealth tax’s constitutionality unanswered. The narrow ruling means the legal battle is far from over, with both proponents and opponents finding elements in the opinions to support their positions.

Supporters of a wealth tax can point to the fact that the majority opinion did not foreclose the possibility. The Court’s refusal to strike down a tax on undistributed corporate earnings keeps the door open for arguments that other forms of unrealized gains could be taxed. They might argue the Court’s deference to Congress in corporate taxation could extend to other areas to address wealth inequality.

Opponents of a wealth tax will draw support from the dissenting and concurring opinions. The dissent by Justice Thomas provides a clear argument that the Sixteenth Amendment requires realization, which would make a wealth tax unconstitutional. Furthermore, the concurrence from Justice Barrett expressed strong views on realization, suggesting at least four justices are skeptical of Congress’s power to tax wealth directly.

Any future proposal for a federal wealth tax would still face immense legal hurdles. The central, unresolved question remains whether taxing the appreciation of personal property, such as stocks or real estate, before it is sold constitutes an “income tax” under the Sixteenth Amendment. If it does not, it would likely be considered a direct tax on property. The Constitution requires such taxes to be apportioned among the states according to population—a logistical and political impossibility for a modern wealth tax. The Moore decision did not resolve this fundamental issue, ensuring it will be at the heart of any future legal challenge.