The Supreme Court is poised to hear arguments Tuesday in a closely watched case that some warn could have sweeping implications for the U.S. tax system and derail proposals from some Democrats to create a wealth tax.
The dispute before the justices, known as Moore v. United States, dates back to 2006. That year, Charles and Kathleen Moore made an investment to help start the India-based company, KisanKraft Machine Tools, which provides farmers in India with tools and equipment. The couple invested $40,000 in exchange for 13% of the company’s shares.
KisanKraft’s revenues have grown each year since it was founded, and the company has reinvested its earnings to expand the business instead of distributing dividends to shareholders.
The Moores did not receive any distributions, dividends or other payments from KisanKraft, according to filings with the Supreme Court. But in 2018, the couple learned they had to pay taxes on their share of KisanKraft’s reinvested lifetime earnings under the “mandatory repatriation tax,” which was enacted through the Tax Cuts and Jobs Act, signed into law by President Donald Trump the year before. The tax was projected to generate roughly $340 billion in revenue over 10 years.
A few things to note about this case.
First, this couple has spent far more money fighting this case in court than it owes in taxes. They are suspiciously well funded.
There is roughly $2.6 trillion dollars in untaxed earnings being held overseas in order to avoid taxation.
US businesses pay taxes on income, but foreign investments used to only be taxed when an asset was sold. This is a massive loophole for international businesses that allowed them to stash earnings indefinitely by moving money from one bank account to another, and only repayriating the money when it would minimize tax liability.
Closing this loophole without a one-time levy would have rewarded corporations engaged in tax avoidance with a $2.6 trillion tax cut.
The Moores did not receive any distributions or payments because they did not want to receive any taxable distributions or payments. That’s the scam, to make it look, on paper, like they aren’t earning anything while their portfolio grows. Meanwhile, they are free to leverage that value in the form of loans.
This is not a fight between the big bad IRS and a mom and pop investor just trying to make ends meet. This is international oligarchs hoarding wealth in tax shelter nations, and if the SCOTUS rules in their favor, it’s going to come out of taxpayer pockets.
That is an excellent writeup, but misses the key argument:
is really just a fancy way of differentiating “realized” income (where an asset was sold for more than you paid to buy it, and you have the profit in hand) vs. Unrealized Income (where an asset is valued at more than what you paid to buy it, but you haven’t sold it yet). It is more of a burden to tax unrealized income, because some unrealized assets aren’t able to be sold easily and applying a tax to those may force those assets to be sold early if the tax is high enough.
So while it creates loopholes where the wealthy can structure their businesses so they take a very low personal income while financing much of their lifestyle from their unrealized assets, there is also an element of fairness in it: imagine the shitshow if you had to pay extra every year if you owned a house outright but the property values kept going up?
The answer is in the plain text of the 16th amendment, though:
Where it gives the Congress power to collect taxes on all incomes, full stop, without regard to whether they are realized or not. Congress does tax unrealized income, after all, such as on estates, they just do it with a large amount of restraint because they know that it’s not always appropriate.
And while normally we can count on this Conservative court to vote in favor of the plain text in the Constitution, I am not so sure on this one. Perhaps the writers of the amendment should have had the forethought to throw a “shall not be infringed” in there, since those are the only words some Conservatives know in the Constitution.
“imagine the shitshow if you had to pay extra every year if you owned a house outright but the property values kept going up”
Like property taxes, then. ;-)
Realistically, I understand the issue. If I had to pay taxes on the increase in price on my house (say from a $300k valuation three years ago to a $500k valuation after the market bubble), I’d be fucked to find 15% of that overnight. Of course, if they allowed that to be offset by the primary residence exemption, it would be a zero cost. Without that, it would still be a non-issue for 95% or more of US taxpayers because most people simply don’t own an illiquid asset that increases in capital value (much less an international one), and if you exclude secondary real estate that non-issue number probably increases to more then 99.9%.
Where the fuck is the property tax rate 15%?? Highest in the US is still less than 3%.
https://www.rocketmortgage.com/learn/property-taxes-by-state
I faced this exact scenario. I bought my house in Nov 2019 - right before the giant pandemic price increase. It’s gained $200,000 in value and my property taxes went up by $200/month. Which at my income level is not an absurd burden.
I don’t think we should have owner occupied exemptions on property tax, and I’m happy to pay my share of that tax to keep my city functioning. I DO think we should have burdensome sales/transfer taxes on non-occupying owners.
The property tax was separate, and it happens regardless. The 15% is the long term capital gain rate - if the value of an asset increases (say 300k->500k) I have a 200k gain. I don’t pay tax on that 200k until I sell, but if there were an in-process gain tax, I would. So instead of owing taxes on my profit/gain when I sell, I would pay the gain each year (and carry over a loss if the value of the house decreased). Coming up with 30k (200kx15%) would be a tough think to do simply because my neighborhood got popular in the Real Estate market.
Oh sorry, I thought you were talking about current taxes, not a hypothetical future wealth tax. Of course a wealth tax should exempt one primary owner occupied property until sold.
My other big question: What about times when the asset doesn’t pay off? Does the US government cut me a check or did I just get taxed on money that never existed in the first place?
When the asset doesn’t pay off you get to write that off on your taxes.
So when something like 2008 rolls around, the US Government just gets 1/8th its income at a time it really needs to pay out?
YES! And this is the problem with profit based taxes. You should be taxes on what you have (property taxes) and what you receive (gross receipt taxes). The ebb and flow of commerce does vary, but the overall work and wealth is more stable. It also makes taxes harder to dodge as there are no deductions for expenses or other items. My local business tax is this way - I pay a couple percent in fixed assets tax, plus a (I think it’s less than a) percent on my gross receipts - take what your paid, multiply it by 0.012, send that amount in. Simple, effective, and relatively consistent. It also, in a very simple way, reflects that government services are not a bonus the town gets when you make a profit but a cost of doing business. My power company charges me whether I make a profit or not, as does my web service, my copier maintenance plan, etc.
That puts it pretty simply, but yes. And at least in 2008 it was mostly loans instead of hand outs so it got paid back.
You can write off losses on your taxes. If you have enough losses you might get a tax refund.
So, I paid the government 15% because they thought my underlying asset was worth more than it was actually worth when I actually tried to get the money, then I can only claim and offset $3k per year for the rest of time unless I have a bunch of new capital gains?
That is fundamentally fucked.
You mean property tax? Because almost every state already ups your taxes if your value goes up. In TX they reassess every year. In CA they had to pass a law to STOP doing it (now it only goes up by a flat rate every year if I remember correctly), but that has led to new loopholes to avoid tax.
But I do see your point. For normal people, their main or only asset is their house. They need to live there and aren’t necessarily getting 10% pay raises when their value goes up 20%. If my house were taxed at its current value, I don’t think I could afford to live there since I don’t own it outright.
The big issue is that banks give out very low interest loans based on assets that have unrealized gains. Those loans are used as income by wealthy people but aren’t taxed by the government. They are “taxed” by the banks getting some money in interest, but the government sees none of that and it’s at a much lower rate than capital gains.
Ok so tax loans on unrealized assets as income then
That is one way to do it. That would have to include real estate, though, unless you put in a homestead exemption to protect normal people.
Property tax is a different matter entirely, that is an assessment from the local government that is based on the property value, to pay for local services. It has nothing to do with the property as an investment. Local governments don’t have to find themselves through property taxes, but many do.
God we need to simplify the fuck out of taxes, because my first thought was “those are pretty much the same thing” and then my second thought was “no wait, those have a fundamental difference.”
Oh I agree the constitutional question is clear, and I agree that this articular court is compromised and cannot be trusted to objectively uphold the law. I’m worried about the court of public opinion, though. They are making every effort to obfuscate the critical points, and make it sound like this poor couple has to sell their cat to pay for the illegal tax on an investment that didn’t generate income.
This is false. There are zero dollars in untaxed earnings.
I love legalese. So you’re technically correct. What did you hope to gain by pointing out an error in terminology without qualifying what these assets represent to the owners? That’s like trying to say rich people pay few taxes because their actual listed income is so small, like they have no money, so therefore them paying a pittance in tax relative to the average person is justifiable.
For anyone who doesn’t know, even if these assets aren’t earnings, they can leveraged to do things like get loans. You don’t pay taxes on loans. Loan interest rates are usually far, far less than any tax rate. So you take out a 10 million loan, pay zero tax, and maybe a few percent interest. It’s not income, but you now have 10 mil to spend on whatever you want.
One of the many ways the rich avoid taxes.