This column is the second part of my discussion of a Supreme Court (SCOTUS) case involving a seemingly mundane tax issue that could have significant ramifications to the federal budget and our national debt.
My previous column discussed the case in greater detail, but essentially Moore argues that a provision in the Tax Cuts and Jobs Act is unconstitutional because it taxes wealth rather than income. The 16th Amendment allows the federal government to impose an income tax, but not a wealth tax.
Moore is an individual taxpayer who owned more than 10% of a foreign corporation and was subject to a 15% tax on the foreign corporation’s accumulated earnings that were retained by the corporation. The amount of tax in question is less than $15,000.
Over a century ago SCOTUS decided two cases that probably provide sufficient authority for a Moore victory. The rationale behind these cases only applies to individuals, not corporations, who own more than 10% of a foreign corporation’s stock.
This is a very small subset of U.S. taxpayers and the resulting revenue loss to the federal government from a decision in Moore’s favor using this rationale would be minimal.
Interestingly, Moore is not making the arguments that many tax scholars believe is his best bet to win from a purely technical perspective.
Instead, Moore’s attorneys have made arguments to overturn the entire provision and possibly apply that rationale to other tax provisions.
The Tax Foundation recently analyzed the cost to the federal government and estimated that overturning the provision adversely affecting Moore in its entirety would cost the U.S. Treasury $340 billion in 2024-25. That is fairly significant, but is still relatively small in relation to the overall federal budget.
The Tax Foundation also analyzed the revenue loss if SCOTUS writes an opinion that is broadly applicable to other corporate tax provisions and estimated that would cost the federal government $5.7 trillion over the next 10 years.
Our national debt recently exceeded the $33 trillion threshold. Putting this in perspective, $5.7 trillion is about 17% of our national debt and losing that amount of tax revenue would have significant adverse ramifications on the government’s finances.
But, the Tax Foundation notes that the cost could be much greater than $5.7 trillion because it could also render the international tax agreement called Pillar Two unconstitutional.
Pillar Two targets large multinational corporations that report billions of income to their shareholders and regulatory authorities, but report much lower amounts as taxable income to the tax authorities.
The United States and most of the Organisation for Economic Co-operation and Development nations are counting on Pillar Two to add significant tax revenue to their treasuries to offset budget deficits.
It is not clear how much future tax the U.S. Treasury would lose if Pillar Two cannot be implemented in the U.S., but it is likely to be significant in relation to our national finances.
Unfortunately, the Tax Foundation only considered the impact of a broadly applicable SCOTUS opinion on corporate tax provisions. However, numerous other tax provisions could also be overturned.
Over the past 40 years Congress enacted numerous tax provisions to combat tax shelter transactions that it perceived to be abusive. The legal rationale supporting those provisions could also become unconstitutional if SCOTUS renders a broadly applicable opinion in the Moore case.
The anti-tax shelter provisions not only increased tax revenue by curtailing abusive tax-motivated transactions, but they also caused capital to be diverted to more productive uses instead of tax shelter transactions having dubious economics.
While tax scholars have assembled extensive lists of tax provisions that could potentially be challenged depending on how SCOTUS opines, nobody has tried to estimate the revenue impact if those provisions are also overturned. It is likely that the amount is significant in relation to the federal budget.
Congress does not seem to be able to appropriately address the federal budget, but many, including Larry Summers, former U.S. Treasury secretary, believe that we cannot effectively deal with either the deficit or our national debt by spending cuts alone. They believe tax increases must be part of the solution.
A broadly applicable decision by SCOTUS overturning revenue provisions will exacerbate both the deficit and national debt problems. The lost revenue will have to be replaced.
The question is, to whom will Congress send the tax bill?
For a seemingly obscure tax case involving less than $15,000 of tax, the Moore case certainly has potentially significant ramifications.
Jim de Bree is a Valencia resident.