The Supreme Court announced that it will hear an appeal in Moore v. United States. The legal case is certainly more complicated than I can imagine but, in my opinion, the economic or political-economy case is quite straightforward. The tax grab at the source of the case is a one-time “mandatory repatriation tax” under the 2017 Tax Cuts and Jobs Act, pushed by President Donald Trump. A Wall Street Journal summarizes the legal case (“Supreme Court to Hear Case That Could Block Democrats’ Plans to Tax the Rich,” Wall Street Journal, June 26, 2023):
The court, in an unsigned order, said it would decide a case that asks whether people and companies have to receive, or realize, income for it to be taxed under the 16th Amendment. …
The case stems from a one-time tax on accumulated foreign profits that Congress created in 2017 in the tax law signed by then-President Donald Trump. That tax applied to 30 years of profits that U.S.-based companies held overseas and hadn’t repatriated. It also applied to individuals who owned at least 10% of foreign companies. …
Charles and Kathleen Moore, a Washington state couple, challenged the tax and sought a $14,729 refund. They argued they hadn’t realized any income on their investment in an India-based company and thus couldn’t be taxed. …
The Moores, backed by conservative organizations and business groups, lost in lower courts.
More interestingly, they were supported by libertarian organizations. The Competitive Enterprise Institute has been representing the Moores (see the Petition for Writ of Certiorari). The Cato Institute has produced an Amicus Curiae brief.
Suppose you own an asset (it could be a physical machine, a financial title, or your human capital) whose present value is $100 and which produces a net return of $5 per year. From the perspective of standard public finance, taxing your (realized) annual income at 20%, that is, $1 a year, is the same as imposing an annual wealth tax of 1% on the asset. In other words, an income tax is equivalent to a wealth tax at some appropriate rate. So what’s the difference?
The financial arithmetic seems unchallengeable, but the economic logic goes further, as Geoffrey Brennan and James Buchanan argued in their book The Power to Tax: Analytical Foundations of a Fiscal Constitution. The problem is the following. If Leviathan—what any government is bound to become if unconstrained—taxes your revenue in our simple example, the most it can take is $5 per year. (In fact, what Leviathan can grab is less than that if you are free to move your asset away from its grasp, but neglecting this won’t change my argument.) But if Leviathan can tax your asset, that is, your wealth, it can also tax it at any rate up to 100%. A tax on wealth is a tax on the value of all future income from this wealth, that is, a tax on unrealized income. It opens a much larger tax base for Leviathan, and this is why rational individuals in a contractarian setup would never unanimously agree to give this power to a government.
Wealth taxes don’t only threaten the rich. The most extreme case is slavery, where the slave owner appropriates, or taxes away, all future production of his slave, that is, he takes possession of the latter’s human capital.
“The power to tax involves the power to destroy,” said Chief Justice John Marshall, an observation that Brennan and Buchanan used as an epigraph to their book cited above. The approach of public-choice analysis and its offshoot of constitutional political economy is quite different from traditional public-finance theory of the Musgrave sort (see James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State [MIT Press, 1999]).
