Gerrymandering the Tax Code

The 16^th Amendment is rarely in the news, a mere stepchild to the oft-mentioned 1^st, 2^nd, 14^th, and 5^th, the latter given renewed life by the spate of Donald Trump acolytes who have evoked its privilege hundreds of times.  For those who don’t want to run and fetch their pocket copies of the Constitution, the 16^th Amendment, ratified in 1913, gives the United States the unfettered power to establish taxes on individual and corporate income, “from whatever source derived.” 

Since its enactment, those individuals and corporations impacted by the law, which by now means almost everyone, have sought means to sidestep or outright avoid it.  Lawmakers have often been helpless to keep up as one loophole after another in the tax code is unearthed by the armies of lawyers and CPAs (including my father) whose own income was dependent on how effective they were in shielding others’.

This ongoing game of duck and dodge has spawned a century of jurisprudence, the latest example being Moore v. United States, a case that recently heard oral arguments in the Supreme Court.  At issue is a provision in the tax law passed in 2017, during the Trump administration, which attempted to mitigate some of the billions in giveaways to the wealthy by initiating a tax on certain foreign investments. 

Although the law was passed with overwhelming support from conservatives, some of its most vociferous proponents, none of them poverty stricken, are now seeking to undermine it with yet another loophole.  If they succeed, it will potentially impact a slew of other rules, all of which are designed to make the tax code more equitable for Americans who can’t afford high priced tax planning, meaning how not to pay any.  The government could be forced to refund billions of dollars and lose future revenue estimated at $340 billion over ten years.

The core of the suit, as with so many others involving conservative plaintiffs, is semantics, what the language of the amendment seems to say—as opposed to what it seems to mean—so that, by parsing language, they can come to a definition they like.

Controversy over taxing power is as old as the Constitution itself.  Although one of the primary goals of the delegates to the federal convention in 1787 was to find the means to raise revenue, which under the Articles of Confederation was little more than voluntary, taxation eventually became entwined with the compromises over slavery, the flipside of the 3/5 clause. Article I, Section 2, reads, “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons…and…three fifths of all other Persons.”  (“All other persons” was their delicate euphemism for “slaves.”)

While the representation section became pivotal until the Civil War—and allowed Jefferson to defeat Adams in 1800—direct taxes as envisioned by the Framers were rarely imposed.  

In 1861, however, to help fund that war, Congress enacted an income tax on individuals, seemingly contravening Article I.  Still, the tax remained in force until it was repealed in 1872, even surviving a belated Supreme Court challenge in 1881.  In 1894, during the Gilded Age, when income inequality was inciting increasing outrage, Congress passed the Wilson-Gorman Tariff Act, which again instituted a tax on individuals, a modest 2% on incomes over $4,000, a quite hefty sum in those days.

Many in Congress were reluctant to enact the tax, but they finally did so, confident that a Supreme Court manned by a bevy of laissez-faire justices would annul it.  They turned out to be right, but only barely.  The following year, in a contentious 5-4 decision in Pollock v. Farmers' Loan & Trust Company, the Court ruled “being a direct tax, within the meaning of the constitution, [the income tax was] therefore unconstitutional and void, because [it was] not apportioned according to representation.”

In dissent, Henry Billings Brown, generally no friend of the working class, who the next year would write the majority opinion in Plessy v. Ferguson, called the decision “nothing less than the surrender of the taxing power to the moneyed class.”

As the Progressive Era ripened and defending what was considered the obscene wealth of plutocrats became an inescapable political millstone for many representatives, in 1909 Congress enacted the 16^th Amendment, which was successfully ratified four years later.  The tax was instituted in 1914, a mere 1% and only on incomes of over $4,000 per year, meaning few Americans and almost no one in the working class was affected. (Tax rates could increase to up to 7% for the very wealthy.)

Since then, the thresholds have been lowered and tax base vastly expanded, coinciding with vastly increased efforts to end-run the law.

In Moore, this latest bit of legal legerdemain, the plaintiff’s attorneys—including one who co-authored an article with Samuel Alito, who, despite the Supreme Court’s draconian new code of ethics, has refused to recuse himself—are trying to redefine “income.” 

At issue is the attempt to repatriate billions of dollars held overseas by American investors and corporations.  The 2017 law reduced taxes on foreign earnings, but, in exchange, instituted a onetime “transition tax” on accumulated foreign profits. 

But are these profits “income”? 

In 2006, the plaintiffs, Charles and Kathleen Moore, invested $40,000 in an Indian farm equipment company a friend had started, an outlay whose value had grown to more than $500,000.  When they got a tax bill for $15,000, they sued, claiming since they had never taken any money out, the appreciation was not taxable as defined by the amendment.  In other words, they had not really made any money.

Anyone who shakes their head at an almost half-million-dollar profit as not making any money should also realize that the suit is not only about the Moores, but is widely viewed as a pre-empt to Elizabeth Warren’s proposed 2% wealth tax on billionaires, who also by this definition have not made any money.  (Pass the hat for Jeff Bezos, Mark Zuckerberg, and Elon Musk.)  And the argument that the profit is untaxable because it is unrealized falls flat as well, since many other forms of income incur a tax liability by being “marked to market.”

As they have done with legislative reapportionment, what we have here is merely another attempt by conservatives to use language to contort the intent of the law to give them the unfair advantage they are convinced they deserve.

During oral arguments, the justices were reported to have asked “tough questions” of Moore’s lawyers. Whether tough questions will be followed with a tough decision by the 6-3 conservative majority on the Supreme Court, or if they will choose to once again allow the rich to become richer at the expense of everyone else, may help determine just how extreme this right-wing Court will be in this and the coming terms.