SCOTUS Wealth Tax: Are Appreciated Assets Income?

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Transcript: SCOTUS Wealth Tax: Are Appreciated Assets Income?

Hubwonk Episode 181 December 12, 2023

This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. For most of the history of the United States, a federal income tax was deemed unconstitutional. But the ratification of the 16th Amendment in 1913 erased that constraint with a single sentence: “The Congress shall have the power to lay and collect taxes on incomes from whatever source derived without apportionment among the several states and without regard to any census or enumeration.” Since 1913, taxable income has been understood to be money that is either earned through a paycheck or from profit earned from the sale of an asset. But the U.S. government is challenging that interpretation of income, taking its case, Moore v. U.S.A., to the Supreme Court. In oral arguments heard last week, the U.S. Solicitor General asserted that taxable income may also be levied on the increase on the value of an asset, regardless of whether the owner realizes any of the income from that asset. While the details of this case involve unusual tax provisions on American ownership in foreign companies, the principle at stake is whether income must be realized in order to be taxable. Such a shift in definition could redefine all appreciation assets as taxable income, inviting investors to face a tax bill long before a single cent of income is ever received. Could an adverse decision in the Moore v. U.S.A. case usher in a new regime of taxing appreciated investment, including assets such as a house, in the same way as realized income? My guest today is Tommy Berry, editor-in-chief of the Cato Institute Supreme Court Review, who co-authored an amicus brief in the recently argued Moore v. U.S.A. case. Barry has examined the legal precedence and constitutional history of the U.S. federal income tax and has written extensively on the constraints the Constitution imposes on congressional prerogatives. Attorney Barry will share with us his views on the facts in the Moore v. U.S.A. case, the insight the oral arguments offer on the nine justices’ view on tax law, and the possible effects on American investors if the highest court redefines asset appreciation as income. When I return, I’ll be joined by constitutional scholar, Attorney Tommy Berry.

Okay, we’re back. This is Hubwonk. I’m Joe Selvaggi. I’m now pleased to be joined by Hubwonk listener favorite and editor-in-chief of the Cato Institute Supreme Court Review, Attorney Tommy Berry. Welcome back to Hubwonk, Tommy.

Tommy Barry: Thanks for having me.

Joe: All right. Before we, I’m going to surprise you with this remark — before we dive into our topic today, which is going to be about taxes and the Supreme Court’s ruling about taxes I want to congratulate you on your recent induction into the esteem ranks of the lawyers of the Supreme Court I’m not sure what the title is, but before we get started share with our listeners what happened and how you were fortunate enough to be among the elite attorneys who can stand there before the Supreme Court.

Tommy: Oh well, you’re overselling it a bit, but I appreciate it. Thank you. It requires the arduous task of having been a lawyer for three years, having $200 and having two current members of the Supreme Court bar who are willing to vouch for my character. So that was and filling out many, many forms. And then when you do all that, you get an invitation to come to the Supreme Court and be sworn in in person, which I wanted to do. I was eligible during COVID, but you know, getting sworn in just through me. a piece of paper isn’t as exciting. So, I held out for when they started doing it in person again. And just so happened to luck out that the data I was assigned was a pretty big oral argument, a case called Rahimi about the Second Amendment. And what’s really cool is on the day you get sworn in, you get absolute front row seats. I was literally sitting two feet behind council table at the front of the Supreme Court, and my boss and mentor Clark Neily at Cato Institute gets to go up to the lectern and personally ask the Chief Justice to admit me to the court, and the Chief Justice makes eye contact with me and says, “Mr. Barry, your motion is admitted.” So, I definitely recommend it, and even if you’re never going to argue at the Supreme Court, which I certainly won’t, I don’t think — it’s an experience worth doing.

Joe: Wonderful. Yes, we’ve had our Clark Neily on the show to talk about Rahimi, so great. You’ve got an exciting front row seat to a very exciting case that we’ve talked about on the podcast as well. So, we’re going to be talking about a different case today, one called Moore v. U.S.A. which recently or earlier this week we heard oral arguments. Familiar phase again from Rahimi there was the solicitor general Elizabeth Prelogar, who’s becoming quickly infamous in her skill as arguing on behalf of the U.S. But anyway, we want to talk about the facts. Let’s start just basically at a very high level just to pique our listeners’ interests. What were the basic contours of the case? You’ve been part of an amicus brief for this case. What were the facts in this case at a very high level?

Tommy: Sure. So, this goes back to a political compromise in 2017, shortly after President Trump took office, you know, one of his first big legislative accomplishments was the Tax Cuts and Jobs Act. It cut taxes in a lot of areas. It reshaped the way that foreign taxes on foreign corporations that U.S. shareholders may own part of — it kind of changed the way that system worked. There was concern mostly on the Democratic side of the aisle that it might cause too much of a short haul in tax revenue, especially in the U.S., especially in the United States. the short term. So as a compromise, they invented a one-time only very unusual tax that they called the mandatory repatriation tax (MRT). And it kind of invented a legal fiction that said for one time only for 2017 tax year and only 2017 tax year, we’re going to tax certain shareholders who own at least 10% of foreign corporations as if they had been receiving dividends for the whole length of time that they’ve owned these corporations going back years or even decades. So, it sort of looks at what was the earnings of that corporation during whatever time that they held that shares in that corporation and treated it as if they had made a profit off of it, even if in fact they had not, which is why I call it a legal fiction. And unusually, it didn’t look at just one year, it went back for however long that they held ownership stake.

Joe: Okay, so we’ve got some facts in the case. We have a couple. I’ll just introduce some sort of more specifics. I think they invested about $40,000 in a firm that’s in India. I think they co-invested with a friend. They own about 13%, which clears that 10% or more share. As you mentioned, it’s a 2017 Tax Cuts and Jobs Act, and they sort of got swept up in this so-called mandatory repatriation tax, but they had never actually received the penny from this company. They just essentially, notionally, their value in the firm had increased. I don’t have that number in front of me. But effectively, this is a tax, in this case, on the notional increase in their value of their assets, not actual income that they’ve received. So, we’re going be talking a lot about income, what that means, about how it is that the government is able to tax us, the federal government is able to tax us. So, let’s get a little history lesson here before again, we dive into the facts more deeply in this case. How is it that the U.S., the federal government can tax our income? Again, I think our listeners might be surprised to learn that for the vast majority of our country’s history, we didn’t have a federal income tax. Where does that come from? And how is that constitutional?

Tommy: That’s right. So, during the Constitutional Convention, there were many compromises as a anyone with some knowledge of that history knows many of the compromises were about big states versus small states. One of the fights was about, you know, the Congress, the House and Senate — should one represent larger states more? The smaller states didn’t really like that there was a U.S. House where the big states would have more representation. So, they got a concession that kind of what the Framers thought was a clever, a clever sort of two sides of the coin compromise, which was that not only would larger states have more members of the House of Representatives, they would also have to pay more in so-called direct taxes. Now they didn’t define what that term was, but essentially they said whatever a direct tax is, that that would be apportioned among the states based on population, the same population formula that’s used to allocate representatives. So, if at the time Virginia was three times as populous as Rhode Island, you would have to take three times as many direct taxes from Virginia as Rhode Island. Now what might immediately become apparent there is that that makes no reference to the incomes of the various states, and not every state has the same level average level of income. Some states have much higher per capita income than others do. So, it quickly became apparent that if an income tax is a direct tax, it wasn’t going to be feasible to impose an income tax on the basis of income across the states. So, to use a modern-day example, I think Massachusetts has the highest per capita income. I think Mississippi might have the lowest, but if they have roughly equal populations, you would have to, under this original rule, take the same amount roughly based on their populations from those two states with no regard to the fact that people are making way more money in Massachusetts. So, the federal government tried to impose an income tax. They argued that it’s not a direct tax, but the Supreme Court in a case called Pollock in the early 20th century said, “No, this is a direct tax. You do have to apportion it, and therefore we’re striking it down.”

And at that point, it became apparent that the only way to impose an income tax would be to pass a constitutional amendment that exempts income taxes from this apportionment requirement. The apportionment requirement effectively made it infeasible to impose a federal income tax. And that’s exactly what happened. The 16th Amendment, as a direct response to Pollock, was proposed, was enacted and ratified, and it exempts income taxes from the apportionment requirement. And ever since then, we’ve had a federal income tax for that reason.

Joe: Okay, so I think I’m keeping up. We wouldn’t want Mississippi and Massachusetts to pay the same tax per capita because, presumably, we’d be severely regressive, meaning the poorer state, the harder that tax would hit each individual member of that state. So, until the 16th Amendment, that was 1913, I believe, effectively, it was untenable. You couldn’t do it. All right, so now here we are, 1913. We do now have the 16th Amendment. It’s ratified. But the definition of income, when we’re talking about federal government, because it’s been carved out as a special category, has to be defined itself, all right? What does income mean when we’re talking about it as a special case in the 16th Amendment? Does it, you know, what does that word mean? Because I think it’s going to speak to what we talk about in the Moore case.

Tommy: Exactly, and the Supreme Court has sort of created a definition through case law, through a series of cases where the government has tried to push the envelope of the bounds of income, and the Supreme Court has a few times struck it down and pushed it down. back and said, no, that doesn’t qualify as income. So, the key seminal case is an early case called McComber v. Eisner. This is one where the federal government tried to impose taxes on essentially what would be called today a stock split. This is where you might own, you know, there might be a million shares out of a stock and each share is worth $50. They instituted a split. Now there are two million shares, but each is only worth $25. So, no one really owns anything more, really. The number of their shares, they own doubles, but the value of each share is cut in half. But the federal government tried to nonetheless impose a tax when that happens, basically tax everyone who owns stocks when a stock split occurs. And the argument the government made is, yes, okay, they aren’t really gaining anything more in terms of the value of this stock from the split self, but it’s a proxy or it’s a sign that there has likely been growth in the company they own. Stock splits usually happen once a company’s overall value has grown so much that the value of each individual stock has roughly doubled and then they do a split to kind of bring it back down to where it was. So, they said treating this as a proxy were allowed to tax stock splits because it’s a proxy for people who owning shares in companies that have grown a lot. And the Supreme Court said, even if that’s true, even if this is a proxy, and even if everyone’s subject to this does own shares that have grown a lot, that’s still not realizing income. Because until they get paid a dividend, or until they sell it for a capital gain, they haven’t had any sort of benefit from this doubling. I mean, think about it. It could be that the company goes bankrupt the next day, and then the shares they own go to zero. So, these are potential capital gains, but not yet realized capital gains and the Supreme Court struck down that tax. So that’s really the foundational precedent that says you can’t use things as proxies or you can’t just treat wealth appreciation as if it’s income.

Joe: Okay. All right, so the bright line there is, again, though the government has tried creative ways to access money that has yet to be received, the real bright line seems to be that though your asset may have appreciated either through proxy or some notional, let’s say stock market spot price or something, it’s not your money, it’s not income, it’s not taxable until you either receive it or get control of it. Is that roughly the line?

Tommy: Yeah, that’s exactly it.

Joe: Okay, all right. So now we come to the Moores, which is it sounds like a pretty similar case, whereby they have an asset, it’s in a foreign country company, and it’s gone up in value. But yet, they haven’t received this money. Now, I want to put a pin in this idea that often companies will retain earnings or not distribute their profits or their earnings and choose to do other things with it. But this company did produce a profit that they retain. In other words, they reinvested it. It sounded like a very good company that had helped small businesses in India. But rather than distribute it to the Moores, they kept it the value of that firm, presumably because of the growth of the retained profits grew, the Moores didn’t see a penny. How is it that there’s any claim to the increase in the asset as defined as income?

Tommy: So, I would say that there are two — there’s one precedent and there’s one other aspect of the tax code — which the Ninth Circuit, at least, relied on heavily to say it’s okay to treat this as an income tax. So, the precedent is called Helvering v. Horst, and that was one where, roughly speaking, a father bought a certain instrument like a bond, gave it to his son as the gift. Eventually, that came due, the son received money from it. And the question was whether the income tax could be then imposed on the father, rather than the son. And the Supreme Court said, “Yes, it can be. You don’t have to literally receive cash money to necessarily realize income. You can have other types of benefits, such as the benefit of knowing that your gift has essentially accrued, that the person you wanted to give the money to has now received their money.” So essentially, when someone gives a gift, you can tax the person who gave the gift rather than the person who received the gift. But still, so the question and what some people have interpreted that case to mean is you don’t have to realize income at all to be taxed.

That’s what the Ninth Circuit said when the Moores challenged this case and challenged this tax, and the Ninth Circuit rejected it. But the alternate reading that I think is correct is that the Supreme Court was simply saying realizing can have broad meanings — that it refers to some sort of benefit, but it doesn’t have to be literal monetary benefit. It can be an emotional benefit or some gaining of control or something like that. So that’s what makes it a little bit more difficult sometimes to draw that line of what’s realization, given that it’s more than just taking in money. If it were just taking in money, it would be a very easy line to draw.

And then the second precedent, not a judicial precedent, but a practical precedent is the so-called Subpart F of the tax code. And the MRT in some case sense was based on subpart F, but it expanded it in an important way. So, Subpart F similarly taxed people on mere ownership in foreign corporations, even if they didn’t distribute dividends, but importantly, it was only based on one year at a time. And so, it was more plausible to say, as somewhat of a legal fiction,

that ownership in that particular year of a stock of a company that was expanding was likely to go along with certain increases in ability to control that company or ability to take advantage of that increase in the value of the company in some way. What the MRT crossed the line that none had crossed before was treating accumulated increase in value back years or decades as a legal fiction, as income. But the Ninth Circuit essentially didn’t see a real distinction between Subpart F and the MRT. So, it said assuming Subpart F is constitutional, which the Supreme Court has never upheld it, but it’s been on the books for 60 years — assuming that’s constitutional, they said we have to uphold the MRT. They said otherwise, if we strike down the MRT, the 60-year-old law is going to have to be struck down too, and we don’t want to rock the boat.

Joe: Yeah, it seemed to me, and again, we’re going to talk about that now, the oral arguments, it seemed both sides were worried that, regardless of which way this goes, it’s going to disrupt the past or the status quo, right? That the status quo is at risk, either way that the Supreme Court argues. or decides. So, let’s get to the actual oral arguments. Again, I mentioned earlier, it was what I think it’s soon to be becoming a legend, Elizabeth Prelogar, who argued for the U.S. What was the crux of the U.S. argument here, given the precedence you described? What was sort of the essence of her argument saying, look, the Moores owe this tax?

Tommy: I think she was very smart to back away somewhat from the more extreme position that the Ninth Circuit took. So, when the Ninth Circuit upheld it, they essentially said there’s no realization requirement and Congress, the 16th Amendment, allows Congress to define income however it wants. In other words, we as courts just need to back off and not draw any line. Prelogar, I think very smartly, realized that the Supreme Court isn’t going have an appetite for that, but that that was essentially make the 16th Amendment a dead letter if there’s no judicial enforcement of it whatsoever. So, she’s somewhat hedged on whether this is realization or not, but she left the door open and I think she probably thinks this is the more likely winning argument to say this was in fact realization, just under a broader interpretation of what realization means — that if you look at precedents, or at least practices like Subpart F, this isn’t really that different from it and you can at least make some sort of stretch of a case but still a case that ownership in something that has appreciated gives you certain benefits that you can take advantage of that perhaps ownership of some of stock that has appreciated could give you more leverage in negotiations or things like that. So, in other words I think she was arguing for a very broad interpretation of realization, but still keeping realization there as some line that the government can’t cross so that the Supreme Court feels like it’s at least not, you know, opening the door to anything and everything.

Joe: Well, I think in listening, again, I’m the layperson, you’re the expert. I just listened, I didn’t actually, I wasn’t in the room, but it seemed like it was a colorful debate as to sort of everybody seems to be an originalist now and they’re trying to debate whether income — the word realized was left out of the 16th Amendment — and there’s sort of a debate whether that was deliberately left out, meaning it didn’t have to be realized, didn’t have to be accepted. And others saying income, you know, the definition of income, saying realized income is almost redundant. No, income is an income realized. Well, say more about this debate and whether you think it’s subsequently matters.

Tommy: I think it does matter. I mean, it is tricky because the 16th Amendment is pretty spare. I do think that the Moores, the challengers, had some convincing arguments from things like dictionaries at the time, and it often was in reference to realization. And I think you could just ask sort of what’s the alternative? What’s the line besides income that’s meaningful, but that goes beyond realization, especially if realization is defined broadly? I thought the arguments were somewhat frustrating, in that there was a lot of sort of amorphousness between, are we arguing for a very broad definition of realization, or are we arguing that realization isn’t aligned and that you can somewhat go past it. But either way, it sort of comes out the same way in that I felt like the government was saying, either way, it’s a very wide latitude, but it’s not an infinite latitude. Importantly, you know, saying, you don’t have to worry about your opening the door to a future wealth tax or a future property tax on every house anyone owns.

Joe: Well, again, then the oral argument went into these sort of scenarios, which I was very sympathetic to these arguments, which say, OK, if we sort of either throw out or define broadly realized, or say that it’s almost superfluous, you know, I don’t know how that would work. in that we all, well, perhaps not all, but we all make money from income, and we all make money from investments or the appreciation of our investments, our house or something like that. You know, broadly speaking, we don’t pay income or capital gains tax until we earn the money, or we sell the asset. You know, I think our listeners will relate to the fact they may own a house, they may have bought it for a million bucks, 10 years later, they sell for two million bucks. They know they’re not paying, you know, $100 ,000 worth of appreciation tax every year. They essentially don’t pay that till they sell the house. If the Moores — or this case is ruled in the way the justices seem sympathetic to — wouldn’t this open the door to taxes on notional income that isn’t realized is just the appreciation of an asset?

Tommy: That’s definitely the concern. And one thing to stress is that there’s a difference here between federal versus state or even local. And we do sometimes see especially local, you know, property taxes at the local level going to pay for public schools and things like that. But it’s always been an important distinction that those are set by governments at the local or state level, which are more connected to each individual taxpayer. So, you don’t have the concern of the national government imposing taxes on a bunch of rich people in one state because voters in some other states wanted to do that. So, to the extent that we have property taxes currently, they’re a little more democratically justified, or there’s that protection of only being at the local level. So, it would be an entire sea change to if we suddenly had the equivalent property taxes like the kind you pay for public schools now being imposed by the federal Congress nationwide. I do think the Supreme Court is concerned about that, and they seemed like they were looking for the Solicitor General give them some kind of line to reassure themselves that they’re not opening to the door to that, which is why I lean towards the view that they’re not — even if they do uphold this law, which perhaps they’re leaning towards — they want if they seemed like they were looking for some way to uphold it while keeping that realization argument and saying this was in some way realized even if you kind of have to squint a little bit to see it.

Joe: Well, that’s a bit reassuring. Again, I like to ask these questions because as I’ve started to study the Supreme Court a little more, I realized it’s not just nine faces. Each justice sees the world very, very differently and the law very, very differently. Did you see in these back and forth of the oral arguments any clear divide between sympathies, you know, through what we traditionally think of as left and right, you know, Republican appointed justices versus Democrat, I think, I don’t know who you would consider farthest right, maybe Thomas or Alito and farthest left, certainly Sotomayor, were the nature of their questions, informed and be sympathetic to one side or the other.

Tommy: Certainly, Justice Kagan and Sotomayor were particularly concerned about striking down a lot of previous precedents and striking down the notion of what Subpart F have to fall and things like that. And Justice Kagan, there was one amusing moment. Justice Kagan is the only former Solicitor General herself currently on the Supreme Court. And she came to the defense of the current Solicitor General at one point when some of the more conservative justices were pushing her on the fact that she refused to explicitly kind of disavow the constitutionality of anything in the future. Justice Kagan said, well, isn’t it literally your job to potentially defend whatever the government does in the future? So, we can’t really hold that against you because you would have to come back and defend any law that was passed in the future. So, in other words, Justice Kagan making the point that is correct that ultimately the court has. has to bear the responsibility to draw those lines. You can’t ask — you can’t expect the government’s lawyer to draw concessions about what the government can’t do in the future. Among the more right-leaning justices, there was definitely a split with a few, Justice Alito especially, were extremely skeptical and focused on the potential negative effects of opening the door to taxes on unrealized income. I felt that others like Justice Gorsuch were really looking for some kind of compromise. And Justice Gorsuch even suggested, well, given that the Ninth Circuit didn’t treat this as realization, could we even send it back? Could we remand it? Could we say you do require realization, but since it wasn’t really briefed focusing on that as much, do we send it back for the Ninth Circuit to decide whether, in fact, there was realization here after we tell them that you need to find that to uphold the law. So, a lot of justices put very different possible outcomes on the table.

Joe: For me listening again as a layperson, it seemed to me that justices or maybe the argument or the whole aura of the thing, I mean, I don’t think people sort of understand the notion of either retain profits or earnings that, you know, I would use an example very simple example —you know if I have a stock that’s worth a hundred dollars and that share earns ten dollars that year, the company has a choice it can distribute it as a as a dividend and then I get it and I spend I get income tax or they retain it and build a new factory with it, right and then in theory my share instead of a worth a hundred now It’s worth a hundred and ten dollars and someday the government will get its money. When I sell that share, but ultimately though my share has gone more valuable, I don’t pay any tax. That’s kind of how it works, right? And that’s how it’s supposed to work. Do you see, like, there seem to be nobody sort of grasping the idea that there’s a value in leaving these earnings or profits in the hands of those creating the profits so as to, you know, say, compound those profits. Did you see any tension there that seemed an uninformed viewer or entirely legalistic rather than, frankly, an accounting question?

Tommy: Right. Well, this can be obviously one of the frustrations of legal cases and legal argumentation is that sometimes you do kind of focus down on the trees of the legal question and miss the forest of, you know, would this be good policy or not? Now, you know, the Supreme Court to its credit knows to somewhat stay in its lane, and it’s laying really is just a legal question, the constitutional question. But I do think you’re absolutely right that as we’re discussing this case, we certainly shouldn’t lose sight of the policy issues, the problems as a policy matter that come from jumping into that process early, you know, taxing people before they’ve actually realized anything from it. I think the Supreme Court, you know, they will often be self-deprecating when any case comes up about how they’re not subject-matter experts, whether it’s tech, whether it’s business, and so on. And that’s true here. So, to some extent, it may be a bit disappointing, but it’s not surprising that they mostly stuck in their line, lean to history of the 16th Amendment, the language, and the precedents they have to work with and so forth.

Joe: Again, soapbox alert here, I think I worry that if we start taxing a notional increase in value, A, it’s very hard to assess. right? Like a wealth tax, how much is your house really worth? You don’t know until you actually sell it or your company that, yeah, we can guess, and that’s why we have a stock market, but just as the stock market fluctuates moment to moment, the actual value of a company doesn’t, you know, it’s just, you know, it’s imagined until it’s ultimately sold. Do you see sort of, you know, investors shaking in their boots or you’re like what possible response, you know, would it be a legislative response? What kind of bulwark would we have against let’s say, suddenly saying to the government, sure, you know, if you think that person’s wealthier, I think that the term to use from point A to point B or a moment in time to a moment in time, defining income as the difference between what you were worth yesterday and another day, that delta, both in income and value of your assets is actual income. That’s to me like made the hair on the back of my neck stand up What do you think about that?

Tommy: Well, that’s the concern is that if the Supreme Court opens the door then the only veto gate left is Congress and the president now. Obviously, you would still have to pass the Supreme Court saying it’s hypothetically constitutional to do X doesn’t mean X is immediately enacted You still need to get it passed through the House and the Senate and signed by the president president. But that’s still, you know, you can never predict which way the political winds are going to blow, and things get lots of popular attention, especially more populist policies. You can see a lot of popularity kind of snowball for it faster than you might think. So, it certainly is concerning. Now, I think you can still make a lot of good policy arguments as you’re pointing out to oppose that in the future. But certainly from a legal perspective, you’d much prefer that the court draws the line now and I think one point about this case is it’s I think it’s actually good that this is a rather obscure law that they’re deciding this issue under, because there would be a lot more political heat and that might be sort of obscuring things if this were happening over say a President Elizabeth Warren signed wealth tax 20 years from now then you know every every partisan in the country is going to be fighting about it, and there might be more heat than light. Here at least we kind of have a little niche thing that most people didn’t even notice in the Trump tax cuts. And so, we can be a bit more legalistic and go back to first principles without it kind of devolving into intense, you know, partisan fighting, like in say the Obamacare case.

Joe: Okay, so let’s spell it out we can, win, lose, or draw, you can’t know. I guess this case will be handed down in the spring. You can’t know how they’ll rule. I think it’s a coin toss listening to the questions and trying to guess how they’ll rule. I think what you suggested — and I think what even Solicitor General Prelogar reassured the court — that this ruling would be very narrow. It wouldn’t be broad sweeping, it would be just the facts in this case, which maybe makes it less useful. But let’s play it out. What’s the worst case for the Moores? What’s the worst case for the U.S.? And what’s the narrowest definition that could just in a sense leave us where we started?

Tommy: Yeah. Well, worst case for the Moores is that they fully adopt the Ninth Circuit approach. So, the Ninth Circuit said no realization whatsoever. It’s up to Congress. In other words, the 16th Amendment almost in my view becomes an inkblot for Congress to fill in the gaps, and it’s just a political question — that in other words, as long as Congress wants to say it’s income, that’s when it’s income. I don’t think the Supreme Court will do that, but we saw the Ninth Circuit do that. So, it’s not entirely out of the question. So that would be the worst-case scenario for the Moors. Worst case scenario for the U.S. is that they do reach beyond just this tax, and they say, you know what, we’ve never looked at Subpart F, the tax dimension that’s been on the books for 60 years, but that doesn’t really make a lot of sense either. And they say, you know, we’re going to set down a rule that any appreciation in tax held can’t be treated as income. And if that means that a likely challenge to Subpart F in the future would succeed as well, fine, that’s the line we’re drawing. I don’t think they’ll go to either of those extremes, but those are both potentially on the table. What I think that they will do is — what I think they want to do, as you said, is rock the boat as little as possible — have some ruling that doesn’t affect any taxes currently on the books, except maybe this one, but also that doesn’t necessarily open the door for any future taxes that would push the envelope further besides this one. So, in other words, they want to either strike down or uphold this tax without really affecting the people who have said or thrown out numbers like you’d lose a trillion dollars in revenue if other taxes like this were struck down. And I think that’s made them a bit nervous.

Joe: Or on the flip side, realize trillions of dollars in new revenue if it’s broadly interpreted in favor of U.S.A. So, lots at stake. So, we’re getting close to the end of our time together. I hope we’ve piqued the interest of our listeners, both, let’s say, the accountants among us, tax accountants, attorneys, but also just ordinary citizens thinking, can the government go after my investments? And ultimately, I think this reflects a bigger disfavor for investment, earned so-called unearned income or money made from other money. Yeah. I’ll get on my soapbox and say look I think an income from hard work is virtuous, but we ultimately invest it’s money that we’ve already earned it’s already been taxed we can either spend it or invest it and if you take away that investment incentive we might as well just go out and you know blow it you know you investment money is the money that you risk in order to you know make more money You might lose it, or you might get more money. I don’t know why that’s fallen so out of favor, you know, but it has. So, this, I think this case definitely stokes those flames of people who perceive, let’s say, a sort of a Marxist theory of value, the labor theory of value, which is money for money, money on money, is sort of ill-gotten somehow. But I’d say the difference between the U.S. and our prosperity and either you believe the U.S. works harder or you think investments make us wealthier. Pick your adventure. All right, so we’ve run out of time. Where can our listeners who are now excited about this case learn more about your reading, your writing, your amicus brief and ultimately your views on the likely outcome of this case?

Tommy: Absolutely. Absolutely, so you can go to my page and see all my writings at the Cato website. So, I’m at You can also, once you go there, you can search for Moore and it’ll pop up pretty quickly. If you want to go to our amicus brief specifically, it’s at /legal-briefs/moore-v-united-states-one.

So probably just, probably just Googling Cato Moore v. United States would be faster. But either way, yeah, would love for people to go there. You can read kind of a 500-word summary of it at that page and then you can click on the PDF if you want to read the whole brief.

Joe:  Wonderful, yeah. And of course, you’re very avid tweeter on these topics. So, you keep us all sort of abreast of what’s going on while we sleep. So thank you for joining me again on Hubwonk, Tommy, you always, always a great asset. and you make some dry topics come to life. You really are great at explaining complex issues to late people like me. Thank you for your time.

Tommy: Thank you very much, happy to.

Joe: This has been another episode of Hubwonk. If you enjoyed today’s show, there are several ways to support Hubwonk and Pioneer Institute. It would be easier for you and better for us if you subscribe to Hubwonk on your iTunes Podcatcher. It would make it easier for others to find Hubwonk if you offer a five-star rating or a favorable review. And of course, we’re very grateful if you share Hubwonk with friends. If you have ideas or comments or suggestions for me about future Hubwonk episode topics, you’re welcome to email me at Please join me next week for a new episode of Hubwonk.

Joe Selvaggi talks with CATO Institute constitutional scholar Thomas Berry about the recently argued Moore v. U.S.A. case, which challenges the idea that income must be realized before it can be taxed.

Thomas Berry is a research fellow in the Cato Institute’s Robert A. Levy Center for Constitutional Studies and managing editor of the Cato Supreme Court Review. Before joining Cato, he was an attorney at Pacific Legal Foundation and clerked for Judge E. Grady Jolly of the U.S. Court of Appeals for the Fifth Circuit.