The Volokh Conspiracy
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Taxes on Wealth and on Unrealized Capital Gains Are Unconstitutional
Moore v. United States: The big tax case before SCOTUS this year.
In Moore v. United States, the Supreme Court will decide this year whether the Ninth Circuit was right in upholding as constitutional taxes on unrealized capital gains and wealth taxes. Ed Meese, Gary Lawson, and I have written an amicus brief filed by Philip Williamson urging the Supreme Court to overrule the Ninth Circuit on both points. Our brief presents the original public meaning of the Sixteenth Amendment and of the requirement that direct taxes be apportioned among the States. We urge the Supreme Court to ignore bad caselaw and to stick to the original public meaning of the constitutional text.
The Sixteenth Amendment authorizes Congress to tax "incomes, from whatever source derived" without apportionment among the states. Unrealized capital gains are neither "incomes" nor "derived" within the original meaning of the Amendment. Both popular and legal dictionaries from the years around the ratification of the Sixteenth Amendment confirm that point. So does the amendment's context. and the Supreme Court's near-contempraneous decision in Eisner v. Macomber. All evidence demonstrates that the original meaning of the Sixteenth Amendment is the commonsense one: realization is a precondition for income; money must come into the hands of a taxpayer in order to be taxable "income."
The Ninth Circuit took a different, unprecedented view. The court of appeals concluded that realization is not a precondition for income, and so the Moores could be taxed on unrealized gains in wealth. That rationale is not limited to the Moores, or to the particular tax, which the court applied in their case. Rather, under the Ninth Circuit's analysis, investors might be taxed on their unrealized capital gains in their Vanguard funds or their stock portfolios. Moreover, homeowners might be taxed on their unrealized capital gains in their houses and land. The Ninth Circuit is the only federal court of appeals to so hold. The Supreme Court should reverse the Ninth Circuit and restore the original, commonsense meaning of the Sixteenth Amendment.
The American Revolution of 1776 started as a tax revolt. The Framers at Philadelphia knew that a constitution, which gave Congress the power to enact a general wealth tax would never have been ratified. So the Framers gave Congress a general power to levy indirect "Taxes, Duties, Imposts and Excises," but expressly forbade direct taxes unless they were apportioned among the states according to the census.
The Framers correctly anticipated that indirect duties, imposts, and excises would be the preferred route for federal taxation because there is always an element of voluntariness when one buys an imported good which is subject to a tariff, pays a sales tax on the purchase of a commodity, pays a use or excise tax on a luxury item like a carriage, or pays a gift or an inheritance tax by giving property. The taxpayer can always avoid the federal tax by not buying an imported good or an item subject to a sales tax, by not using a carriage, or by not making a gift or will. A tax on unrealized capital gains is not a tax on a transaction initiated by the taxpayer. It is essentially a wealth tax, which is precisely the kind of head or capitation tax for which the Constitution requires apportionment.
A tax on the Moores' unrealized gain in wealth cannot be considered an indirect duty, impost, or excise. Rather, it is a direct tax. And that requires an apportionment among the several states according to the census, unless excused from apportionment by the Sixteenth Amendment—which it is not.
For these reasons, the direct tax assessed on the Moores' unrealized capital gains is unconstitutional.
