Calabresi: The Amar Brief in Moore v. United States Should Not be Embraced

Is a Federal Wealth Tax a Direct Tax? Steven Calabresi Responds to the Amar Amicus Brief in Moore.

I am posting this entry for its author, Professor Steven Calabesi:

On December 5, 2023, the Supreme Court will hear oral argument in the most important federalism case since it upheld the constitutionality of President Obama's Affordable Care Act.  The case at issue – Moore v. United States – raises two vital matters:

1) Can Congress tax unrealized capital gains, as Yale Law Professor Bruce Ackerman argues in an amicus brief; and

2) Can Congress enact a Bernie Sanders/Elizabeth Warren-style wealth tax, including on unrealized capital gains, as the two Amar brothers (Akhil Reed Amar and Vikram David Amar) argue?

Because of the huge importance of this case, I am going to respond in this blog post to the Amar brothers (one of whom is my second-best friend in the world, notwithstanding our disagreement in this case). They devoted the third section of their amicus brief to critiquing an amicus brief that I co-filed in Moore arguing against congressional power to impose a wealth tax or to tax unrealized capital gains – a brief which was joined by former Attorney General Edwin Meese III and by Professor Gary Lawson.

The constitutional question in Moore v. United States is whether wealth taxes and taxes on unrealized capital gains have to be apportioned among the states based on their respective populations, which it is practically impossible to do, or whether wealth taxes and taxes on unrealized capital gains have to be merely uniform in every state, which could be easily accomplished.  Ed Meese, Gary Lawson, and I argue that such taxes are direct taxes, which must be apportioned among the states, while the Amar brothers say they are indirect taxes that must merely be uniform among the states, which would make them much easier to enact.

The Taxing Power itself is granted in Article I, Section 8, Clause 1, which says:

"The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States."

Article I, Section 9, Clause 4 then critically limits the federal taxing power by saying that:

"No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

The rule of apportionment thus applies to "direct taxes"; the rule of uniformity applies only to such indirect taxes as "Duties, Imposts, and Excises.

The flaw in the Amar brothers' brief that I will discuss today is that it construes the text of the Constitution according to the expected applications of certain historical figures rather than its plain objective meaning.  The Amar brothers rewrite Article I, Section 9, Clause 4 to say:

"No Capitation, or Land Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

They argue that wealth taxes and taxes on unrealized capital gains in your house or Vanguard fund are perfectly constitutional.  They say, contrary to the text of the Constitution, that Article I, Section 9, Clause 4 bans only federal capitation and land taxes and that nothing else is a direct tax.

The original public meaning of the words "direct tax" is clearly set forth in two law review articles: Robert Natelson, What the Constitution Means by "Duties, Imposts, and Excises"--- and "Taxes" (Direct or Otherwise), 66 Case West. U. L. Rev. 297 (2015) and Erik M. Jensen, The Apportionment of "Direct Taxes": Are Consumption Taxes Constitutional?, 97 Colum. L. Rev. 2334 (1997).  Both authors conclude that "direct taxes" included many more taxes than merely a capitation or federal land tax.

Natelson demonstrates conclusively that the phrase "direct taxes" also included taxes on:

"1) Wealth employed in business and domestic life.  Direct taxes included those imposed on land, improvements to land, ('stock in trade'), business equipment, and livestock; 2) Personal and business income.  Direct taxes included levies on rents, business profits, wages, interest, and other income; 3) Business enterprises.  Levies on business profits and occupational fees were direct taxes; 4) Heads.  Poll taxes, also called head taxes or capitations, existed in all of the New England states and in most other states as well.  They were levied both on free persons and slaves.  Capitations were the prevalent way of taxing slaves."  Natelson, supra at 314-316.

It is true that Alexander Hamilton and one Supreme Court Justice, Samuel Chase in Hylton v. United States, 3 U.S. 171 (1796) construed a statute laying a "Duty" on carriages to be a "Duty" but said "I am inclined to think, but of this I do not give a judicial opinion, that the direct taxes contemplated by the constitution, are only two, to wit, a capitation or poll tax *** and a tax on land."  But, this was the original expected application of Hamilton and Chase as to the meaning of very broad constitutional language requiring apportionment of all direct taxes.   The word direct in 1787 meant "Straight; not crooked" according to Samuel Johnson's 1755 Dictionary of the English language and according to Merriam-Webster it means the same thing today in 2023.

The Amar brothers would limit a general term in the Constitution -- "direct tax" -- to its original expected application "capitation and land taxes" simply because that is what Alexander Hamilton, an extreme nationalist, thought it meant.  (Hamilton wanted to abolish the state governments at the Philadelphia Convention while having a President and Senators who served for life).  This is not the way my friend Professor Akhil Amar usually interprets words in the Constitution.

For example, most Americans expected in 1787, that the Commerce Clause applied only to buying and selling. Professor Akhil Reed Amar, however, quite rightly reads it as applying to non-mercantile interstate transactions like recreational traveling or sailing from one State to another.  Professor Amar's view is that "we must remember that it is a Constitution that we are expounding" that would last "for the ages" as John Marshall said in McCulloch v. Maryland, 17 U.S. 316 (1819).  Professor Amar thus praises McCulloch for not giving the word "necessary", in the Necessary and Proper Clause, its Samuel Johnson 1755 dictionary meaning of "indispensable", but he reads it instead to mean "convenient, or useful."

Professor Akhil Reed Amar also, quite rightly in my view, reads the Fourteenth Amendment's guarantee of birth equality to apply to laws that discriminate on the basis of sex or gender and not only to laws that discriminate on the basis of race – which was the original expected application of the Fourteenth Amendment.  And, he reads the First Amendment's protection of freedom of speech and of the press as applying, not only to printing presses -- the original expected application -- but also to movies radio, television, and the internet.

In 1787, people held their wealth in land because there was no stock market or bond market yet and few banks.  It is thus not surprising that Hamilton and Chase in 1796 would read broad constitutional language like "direct taxes" as applying only to capitation and "land" taxes.  A wealth tax today would fall "straight; and not crooked" upon one person in exactly the same way a capitation or a land tax would have done in 1787.

In sum, Professor Amar's broad readings of the Commerce Clause, the Necessary and Proper Clause, the First Amendment, and the Fourteenth Amendment all suggest a broad reading of the requirement that the words "Direct Taxes" impose today.  That clause thus, in 2023, applies to a wealth tax as well as to a federal capitation or land tax.  Such taxes are subject to the rule of apportionment and not of uniformity.

Comments

[Lee Moore]

Not sure “Natelson says” is the most compelling argument I’ve ever seen.

But since SCOTUS has already decided that “direct tax” is much wider than “land tax” in the income tax case, we know where this will end up. Justice Kagan will certainly not tolerate any infringement of the holy principle of stare decisis.

[Commenter_XY]

Can you imagine the logistical complications of administering this tax law? Our tax code would become impossible.

[damikesc]

It'd be amusing seeing billionaires getting massive reductions in their taxes when some of their investments go down in value. Which is inevitable.

[MatthewSlyfield]

A tax on unrealized gains would cause the value of all investments to fall.

[Stephen Lathrop]

Lindgren writes about history as a non-historian. As usual among that class, he routinely relies on present-minded ipse dixit assertions about the past. Also as usual, Lindgren shows no sign that he knows he does that.

Lindgren perhaps suspects that valid historical inferences follow from a method to mobilize historical survivals with demonstrable relevance to the times, places, subject matters, and contexts under study. But he demonstrates he does not know he must confine his analysis to a method to make his references critique each other—while excluding as irrelevant other tempting means of inference. Historians make that their practice because it provides an indispensable rule to exclude from historical inference spurious influences based on irrelevant ideas and occurrences.

Those typically post-date the time in question, or arrive in the discussion instead from areas and topics remote from those which define the periods and places at issue in any particular historical discussion. In short, irrelevancies encompass the entire corpus of world-wide notions and information of which the figures under study remained unaware at the time, and everything which happened since. Because that corpus comprises almost the entire content of modern thought—the founding era knew nothing at all about 2023—to learn to exclude it from historical analysis becomes a signal challenge which confronts any would-be historian.

There is no point to build historical inferences based on information and contexts utterly unknown to the subjects under study. Better to confine analysis to what the historical figures themselves explicitly posited—or to develop other inferences based only on deductions which historical survivals from the people, places, and times in question might suggest when laid alongside each other. Leave out from the analysis any influence from post-dated citations, future occurrences known to the historian but not to the period in question, and all the discoveries and developments which happened during our past, but in the unknowable future of the time under study. Leave out every modern controversy which tempts the would-be analyst to consult the historical record as a source of justifying authority.

Thus, if you choose to denigrate Alexander Hamilton—viewed from the present as a brilliant pioneer in the development of economic notions and policies—as a historical source about a long-ago controversy dealing with economics (an already suspect category for analysis during a time only incipiently aware of economics as a category)—then it is necessary to denigrate Hamilton with citations to others involved then and there with those very issues. Historically, nothing else matters, or logically can matter.

The would-be historian does better to leave off all modern concerns, and, by the way, to leave out the contributions of dictionary authors—even contemporaneous authors—remote from the scene and events in question. At the very least, leave dictionaries out until you can show some historical figure involved consulting that dictionary as a guide to the issue you purport to analyze.

That method defines the discipline necessary to develop rigor in historical analysis. Lindgren joins a host of others in the legal community by showing none of it. Many of the others actually denigrate history, while insisting on methods of legal interpretation like originalism, which are nonsense without it.

[Michael P]

Lathrop, maybe you should go back and read the first line of the post. It's in bold. Then you can tell us about paying attention and remembering things and denigrating people.

Or you can just file your drivel straight to the garbage can where it belongs.

[David Nieporent]

Wow, that was a lot of words to say, "I didn't read or understand the post, I don't know anything about history, and I don't know how legal analysis actually works."

[Michael P]

What's really sad is that the ideas are simply repetitions of things he has already been thoroughly criticized for posting time and time again. He tweaks the words but leaves the fundamental errors in place.

[Stephen Lathrop]

Nieporent, I don't pretend to know how legal analysis works. I do know that purported originalism cannot work if it cites history without knowing how historical analysis works. Doing that never concerns most folks in the legal community, of course. They do what you do, and insist that they will be the judges of what counts as valid legal analysis, even while they make fools of themselves by pretending expertise in arts they were not educated in and never practice. I have seen a few exceptions, William Baude prominent among them.

What expertise do you rely on when you say I don't know anything about history? You don't have to be specific. Just correct me on a few points about historical method you think I got wrong.

[Krayt]

From what I read about the income tax amendment last night, this problem is exactly what was tripping up early income tax attempts. Why would it be any different here?

[Krayt]

I wouldn’t pass such legislation without a balanced budget amendment. Congress will just spend it all, and continue borrowing anyway.

As with the Internet boom, and the tobacco settlement with the states, politicians spent money decades in accrual in just a few years, and jammed borrowing back up anyway.

So, too, they will inhale a one time wad of cash of decades of increase, spend it all in a few years, and get right back to borrowing.

[Dilan Esper]

Nobody knows what a direct tax is, which means that all the amicus brief authors in this case are liars.

[bernard11]

Absolutely right.

This is a major problem I have with these nitpicky debates over the exact meaning of every word of the Constitution. It is a very good bet that someone who opposes some proposal will support any argument claiming it is unconstitutional, and someone favoring it will take the opposite view. The notion that these are objective analyses is absurd, as is the whole idea that we can discern exactly what a document written over two centuries ago requires of us today.

[Dilan Esper]

I mean, sometimes we know- they discussed what the judicial power is pretty extensively.

But they didn't discuss direct taxes and what they were and were not, at all.

[CommentMonkey]

So what's the alternative? Do judges just decide what they think ought to be considered direct taxes? And are those decisions based on anything other than their personal opinions as to wise tax policy? If so, we really ought to be treating judicial appointments as we would legislative elections, where judicial candidates should have to identify and defend their policy preferences.

The problem I have with this critique is that as difficult as textualism and originalism are in some cases, I think they are superior to giving life-tenured judges carte blanche to decide policy questions. It seems to me that even if correctly determining the original understanding of ambiguous constitutional text is a coin flip - wrong as often as right - that still beats a process in which a judge's personal preference decides the question.

[Dilan Esper]

Textualism and originalism in this instance DO give judges carte blanche. The liberal judges are going to say it isn't a direct tax and the conservatives will say it is.

The actual correct thing to do is say "we don't know what this means, therefore we aren't going to invalidate the work of the democratically elected legislature".

[CommentMonkey]

If I understand this, you're saying sometimes the historical record is so inconclusive as to basically create a tie, and the tie should go to the elected branch. OK, but what if Calabresi and/or the Amars aren't really "liars" but merely disagree with you in good faith. They have put quite a bit of effort into analyzing these issues. Are you really so sure they couldn't be seeing something you missed?

So that's one problem with scrapping textualism/originalism in close cases. Cases in which the historical evidence is in perfect equipoise are going to be rare. People of good faith are going to disagree. Better, it seems to me, to have each case decided on the same metric, than to declare a tie in close cases, and declare the government the winner.

Another problem is that defaulting to legislative power in close cases defeats the purpose of constitutional government. Much of the Constitution is designed as a constraint on pure democracy. The direct/indirect taxation distinction is such a constraint. Saying that in close cases we are just going to ignore that counter-majoritarian purpose feels like a bit of a cop out. Especially when it might result in a massive increase in federal power to confiscate private property.

[Squirrelloid]

Given the constitution is supposed to *constrain* legislatures, this seems entirely backwards. Which means the judicial presumption should go the opposite way: "we don't know how to apply the constitution in this specific instance, so the legislature's work is invalidated until the constitution is amended."

(We do know some things are direct taxes, and we do know some things are not direct taxes, so it's not like we have no idea what this means, we just may not know how to apply it to a particular situation).

That said, it's pretty clear to me that a wealth tax is a direct tax. We needed an amendment to tax income, and this is no different.

[ReaderY]

Professor Lindgren’s argument has nothing to do with Moore. Professor Lindgen’s argument assumes – he makes no argument for it, he assumes as a premise – that Section S corporations are unconstitutional. I disagree.

The Supreme Court has held that Congress is REQUIRED to regard a corporation as an extension of its principals in certain respects. In Hobby Libby, the Court held that the principals’ religious rights can be extended to the corporation.

What’s sauce for the goose is sauce for the gander. In the same way that Congress MUST apply a “pass through” rule and attribute the religious rights of the principals to the corporation, it CAN apply a pass through rule and attribute the income of a corporation to its principals. Such income, whether paid out as dividends or not, is not merely an “unrealized capital gain,” as Professor Lindgren’s argument starts out by assuming. It is income.

Because it is income, the 16th Amendment controls the outcome and permits it to be taxed. Professor Lindgren’s argument about what constitutes a direct tax is true but totally irrelevant. Of course an income tax is a kind of direct tax. All income taxes are. But the 16th Amendment makes income taxes constitutional, even if the particular source derived in Moore has not been taxed before.

S corporation income has been subject to personal income tax for many years. All Congress did here was to hold, as is its power and right, that certain other corporate situations are also to be taxed in a manner similar to S corporations.

The relevant comparator is not unrealized capital gains from ownership of an unsold house. The relevant category is an S corporation. The Constitution does not make S corporations a distinct constitutional category. A corporation is a corporation. If it is unconstitutional to attribute retained corporate earnings to the principals, then S corporations are unconstitutional. If S corporations are constitutional, then Professor Lingren’s argument falls apart.

[mulched]

Professor Lindgren's main argument is that he is not the author. He successfully convinced me of it. How did he fail to convince you?

[ReaderY]

Note : The question presented is “whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states.” The relevant inquiry to a 16th Amendment analysis is whether the “sums” being taxed constitute income. Of course the taxes involved are direct taxes. All income taxes are. Any tax authorized by the 16th Amendment is a kind of direct tax. The question presented assumes so.

As the S Corporation example demonstrates, Congress has been attributing retained earnings by coorporations to shareholders as personal income for many years. Retained earnings are a kind of “unrealized sum.”

I agree not all “unrealized sums” can constitute income. This means the question presented, as stated, is far too broad. I think that’s a mistake on the Supreme Court’s part. It only has jurisdiction to discuss the particular kind of “unrealized sums” at issue in Moore, which involves retained corporate earnings. This particular kind of “unrealized sums” can constitute income. And under Article III, this particular kind of “unrealized sums” is all the Supreme Court has jurisdiction to decide.

So the fact that Professor Lindgren can come up with counterexample “unrealized sums” that don’t constitute income, and I agree such sums indeed exist, doesn’t mean the United States should lose the case.

[David Nieporent]

This means the question presented, as stated, is far too broad. I think that’s a mistake on the Supreme Court’s part. It only has jurisdiction to discuss the particular kind of “unrealized sums” at issue in Moore,

No, that's not true any more than saying that the Supreme Court only has jurisdiction to decide about the taxation of people whose last name is Moore would be.

[ReaderY]

So the Supreme Court can decide that “laws passed by Congress” are constitutional, and every law passed by Comgress is constitutional? It doesn’t have to decide whether a specific law is constitutional under a specific enumerated power?

Here some kinds of “unrealized sums” fall within the 16th Amendment taxation power, some do not. Professors Calabresi and Lundgren are proposing to take example “unrealized sums” not at issue in the case that fall outside the 16th Amendment power, conclude from that that “unrealized sums” in general fall outside it, and hence conclude all taxes on “unrealized sums” are unconstitutional. That’s not only improper procedure, it’s prohibited by Article III.

Article III requires the Supreme Court to ground its holding in the kinds of “unrealized sums” that were actually at issue in the facts of the case. The approach in the original post is not a constitutionally permissable approach.

[David Nieporent]

Article III requires the Supreme Court to ground its holding in the kinds of “unrealized sums” that were actually at issue in the facts of the case. The approach in the original post is not a constitutionally permissable approach.

It doesn't become less wrong because you say it twice.

[MN2828]

Is it a mistake? The Court could rule for the government either under your theory -- this isn't really an unrealized capital gain, we are just forcing a de facto S-election -- or on a broader theory -- this is an unrealized gain but the government can tax unrealized gains. I agree that if the government wins on the first theory, the Court need not address the second. But, it isn't given that Congress can force a de facto S-election and ignore a foreign corporate form. If not, then the Court would need to address the second question.

[ReaderY]

An S corporation is not a special constitutional category. Taxes are by their nature not normally voluntary. The Constitution knows nothing about “S-elections.” A corporation is a corporation so far as the Constitution is concerned. If the 16th Amendment gives Congress the power to tax retained corporate earnings as personal income if the shareholders agree to it, it also gives Congress the power to tax retained corporate earnings as personal income if the shareholders don’t agree to it.

[mse326]

1. This is an argument from Prof. Calabresi not Prof. Lindgren which you would know if you read the first sentence.

2. This is in response to the Amar brief not a full argument of Moore in general. The Amar brief is arguing it doesn't matter if this is income because it would be an indirect tax anyway. So basically you are agreeing with Prof. Calabresi on what this post is about

3. In the brief he authored he does argue why he doesn't think this is what "income" in the 16th A. means. You may disagree with his argument but he doesn't just state it ipse dixit.

[TwelveInchPianist]

“Such income, whether paid out as dividends or not, is not merely an “unrealized capital gain,” as Professor Lindgren’s argument starts out by assuming. It is income.”

Correct. And it’s not even necessarily a capital gain.

This case is a terrible vehicle to decide the question of taxing unrealized capital gains.

[bernard11]

S corporation income has been subject to personal income tax for many years.

As have income accruals on zero-coupon Treasuries and other debt instruments issued at a discount, with no coupon payments.

[Lee Moore]

Which doesn't mean that these are constitutionally sound.

As for the current taxation of OID, that seems to me to be pretty flaky if the precedent is that income has to be received to be "income' within the meaning of 16A.

The S Corporation example is a bit different, because the shareholders have to elect for the corporation's income to be treated as theirs. This raises questions like estoppel, but also questions like - does the money that shareholders have to pay have to be "tax" to be collectible, or might it not be an amount due under a contract with the IRS whereby the IRS - with the permission of Congress - agrees to waive tax on the corporation itself, in return for the shareholders "treat it as if it's ours" election. And even if it isn't, it doesn't seem very difficult to rewrite the S Corporation bit of the tax law, to make it so.

The requirement for an election is a bit of a problem for Reader Y's insistence that everything flows from the precedent of S Corporations.

[bernard11]

Which doesn’t mean that these are constitutionally sound.

Well, I guess not, but OID instruments have been around a long time. Has the tax treatment been challenged?

[Lee Moore]

The Supreme Court has held that Congress is REQUIRED to regard a corporation as an extension of its principals in certain respects. In Hobby Libby, the Court held that the principals’ religious rights can be extended to the corporation.

What’s sauce for the goose is sauce for the gander.

No. Hobby Lobby was a statutory case, decided on the basis that the government had not chosen the least restrictive means of achieving its interest. In particular, the majority noted that not-for-profit corporations were treated as "persons" protected under RFRA by HHS. So the conclusion was that in the context of the statutes in question, the owners' statutory rights to protection from religious discrimination could be protected by exempting the corporation they owned from the offensive regs.

But when we come to the gander - we're dealing with different statutes, which are in turn limited by the extent of the 16th Amendment. The gander is obliged to bow to the 16th Amendment.

SCOTUS is obliged to bow to the RFRA (to the extent, if any, that it is not contradicted by some constitutional provision.

Different sports.

[M L]

Calabresi’s argument seems sound as far as it goes. And it does not go into this corporation aspect at all. I disagree that his argument about a hypothetical wealth tax means that S corporations are unconstitutional.

In the context of this case, I agree with you and TwelveInchPianist above, the income of a corporation is income. There is nothing unrealized about it, except for the status of a corporation as a separate entity for tax purposes which means it is double taxed. Congress need not allow this double tax structure as in the case of pass-through entities like S corps; however it looks like one of the issues in the case was retroactivity. I haven’t followed the case but the issue doesn’t make much sense to me, if it is a C corp then I would think the tax issue would be about entity-level tax on income that is realized, and whether it was distributed to a shareholder or not is irrelevant.

[Bruce Hayden]

It seems to me that the problem here is a misunderstanding of what a Sub S Corp is, and how it operates. Think of it as a corporation for liability reasons, and a partnership for tax reasons. It is taxed just the same as if it were a regular partnership, a limited partnership, an LLC, LLP, etc. The thing that all of these business forms have in common, is that there is one single level of taxation. Sub C (regular) corporations are taxed at the corporate level, and the remainder of the profits after taxes are added to Retained Earnings, and dividends are paid out of such. Then, the dividends are most often considered income to the stock holder. This too is typically taxed. Hence double taxation – once at the corporate level, then once at the individual level for the dividends.

As with partnerships, Sub S corps, etc, the taxable entity is the individual. Think of it this way, Every year, you calculate profits, losses, capital gains/losses, etc for the business entity. This is reported to the IRS on a form 1120S. Tax components and categories from the 1120S are then divided and allocated to the various partners, stockholders, etc, based on some predetermined allocation (usually based on share ownership), and provides those amounts, on K-1 forms to the partners, stockholders, etc. The individuals then take the various categories on their K-1s, and combines them with similar categories on their individual 1040s every year.

Sub S corporations don’t have retained earnings – and indeed, if you convert from Sub-C to Sub-S, you have to pay out your retained earnings to the shareholders first, as dividends. What each partner in a partnership, stockholder in a Sub S Corp, etc has is a Capital account. It works similar to Retained Earnings for Sub-C corps, except that the Capital account for each owner is separately tallied. One owner may take his net profits for the year out of his Capital account. Another may leave it in. In any case, they are considered “distributions” instead of “dividends”, which are paid out of (after corporate taxed) Retained Earnings by C Corps.

Maybe think of it this way – before Sub S can be elected by a Corp, each stockholder must consent – to be taxed as if the corporation were a partnership, and not a Sub C Corp. In exchange, the corporation doesn’t pay corporate taxes, but instead, the stockholders instead take credit personally for the corporation’s earnings, losses.

Which is to say that I completely miss how Sub-S corps could be illegal, any more than partnerships, etc are. They are almost indistinguishable in the eyes of the IRS.

[Bruce Hayden]

“What’s sauce for the goose is sauce for the gander. In the same way that Congress MUST apply a “pass through” rule and attribute the religious rights of the principals to the corporation, it CAN apply a pass through rule and attribute the income of a corporation to its principals. Such income, whether paid out as dividends or not, is not merely an “unrealized capital gain,” as Professor Lindgren’s argument starts out by assuming. It is income.”

I think that is the key. It was income from operation of the corporation. The stockholder is obligated to report it as such, from his K-1, which reports his share of the corporation’s income/losses, capital gains/losses, etc. His tax liability from that is not affected by whether his gains are retained in his capital account, or paid out as as distribution at some point. His Capital account essentially contains the excess he initially paid in, plus profits, less losses, minus distributions. There is nothing unrealized about it, and his tax situation is most often unchanged regardless of whether he receives those distributions, or not. It’s essentially his money.

[dwb68]

The London Stock exchange has existed in some form since 1571 (although before 1801 it was called something else). Parliament passed laws to regulate the Royal Exchange well before the US constitution was ratified.

You can even find economic time series from the 1700s: https://fredblog.stlouisfed.org/2019/12/how-has-the-u-k-stock-market-fared-lo-these-past-300-years/

How were these taxed by England in 1700s? England taxed everything, including windows. We can speculate all day about what was in Hamilton's "mind" but, this seems like an important question to know.

[ReaderY]

Because the 16th Amendment, enacted in the 20th century, explicitly gave Congress power to tax income “from whatever source derived,” both whether a particular source of income was or wasn’t taxed by England in the 1700s, and what was in Hamilton’s mind, are irrelevant to a 16th Amendment analysis. An originalist argument about what constitutes “income” requires looking at what this term meant in the 20th century, not the 18th.

[dwb68]

No: "income" has been understood since the enactment of the 16th amendment to be *realized* income.

Property and wealth taxes are based on unrealized gains and value, by definition.

[bernard11]

“income” has been understood since the enactment of the 16th amendment to be *realized* income.

Not so. As ReaderY points out, owners of shares in S-Corporations pay taxes on their share of the profits, whether distributed or not. Indeed, the only thing that turns profits in a regular corporation into dividends is a decision of the Board of Directors. Whatever you think of our corporate tax system, this is hardly a clearly logical distinction.

Another example is the taxation of zero-coupon Treasuries and other OID (Original Issue Discount) bonds. The interest on these instruments is taxed as it accrues, not when the bond matures.

[JimM47]

If the argument is that wealth or unrealized capital gains can be taxed as income, the sub-S example is totally beside the point, at least if you assume that Congress has the power to lay taxes on corporate entities.

In the case of any corporation -- sub-S or not -- what is taxed is income that the corporation has realized. At a fundamental level, the rules for a sub-S Corp affect whose tax rate applies to the corporation's income, and who writes the check on the corporation's behalf, but they don't change what counts as corporate income.

[Rossami]

That is a distortion of the tax rules. S-corp profits are very much "realized" even though they are not distributed. They are realized by the corporation. The S-corp profits tax is a direct tax on the corporation, not the owner(s).

Corporate dividends, on the other hand, are first taxed as corporate profits then taxed again as individual income when the dividends are distributed.

[Ridgeway]

Yeah -- the S-corp pass-through tax option was set up as a benefit to individual taxpayers. The IRS would certainly be happy to tax all non-individuals as C-corps.

That is why this case (Moore v US) is a bad vehicle to raise the bigger picture issues of taxes on unrealized capital gains. IIRC, the taxpayers opted for partnership treatment, and are now mad that they are they are getting imputed income as a result of that choice. It has little to do with the much easier questions of whether Federal wealth taxes are unconstitutional (spoiler alert -- they are).

[bernard11]

JimM47 and Rossami,

I get your point, but corporate profits are taxed on an accrual basis, not cash. The income is not necessarily "realized" in the same sense that a capital gain is realized when one sells securities at a profit. Income reflected in accounts receivable, for example, is taxed.

And neither of you address the issue of OID debt.

[Yogis_dad]

In other words, the Constitution does not mean what the founders intended, but whatever a court chooses to say the words mean. This politicization of the process has led to incomprehensible expansion of federal powers and misinterpretation of language expressing intent as language granting authority to the central government, in derogation of the rights of individuals and states. Continuing along this path will so impeach the justification of federal exercise as to lead to general disregard of the laws imposed by Congress and the abusive agencies that enforce them.

[David Nieporent]

the Constitution does not mean what the founders intended,

It does not. Not even the most ardent originalist thinks that. Originalism says that the Constitution means what people understood it to mean when it was ratified, not what its authors ‘intended.’

But setting aside that error, how exactly do you propose to decide ‘what the founders intended’ other than by asking a court?

[apedad]

"In 1787, people held their wealth in land because there was no stock market or bond market yet and few banks."

That's a too simplistic statement.

There were 319 corporations chartered prior to 1801 with all the accompanying factors, e.g., banks, stockholders and liquidity, etc.

Corporate securities ownership was not limited to the rich, or even the well-to-do. Many people of middling means bought a share or two in local banks, turnpikes, and other corporate enterprises.215 Most early U.S. corporations had scores or hundreds, rather than just a few shareholders. Ninety-one different people invested in the Charles River Bridge in 1785; 50 different people purchased the 120 shares offered in the Malden Bridge Company in 787.216 At one point in the 1790s, 309 different entities, mostly individuals but also a few corporations, partnerships, and non-profit organizations, owned shares in the Bank of Pennsylvania.217

https://www.nber.org/system/files/chapters/c11744/revisions/c11744.rev0.pdf

Just saying the US economy is the 1790s wasn't just Jefferson-type farmers.

[Longtobefree]

I hate to inject practicality into a nice legal/historical discussion, but who determines the amount of "income"?
A certain politician is in court right now because he has one number and a government employee has another number for the value of an asset.
Will we have enough judges to deal with the constant appeals of tax assessments?

(I may be biased by having lived in CA during the wonderful discussions around Prop 13)

[bernard11]

Thanks.

Leaving fine Constitutional point aside, this is the reason I think a wealth tax is a bad idea. The reason income taxes are complicated is because of the complexities around defining income. (So all those "postcard" reforms are nonsense.)

Wealth taxes would be much worse. Many assets simply don't have an easy determined value. Think of small businesses, art, holdings in private companies, etc. What a mess.

And by the way, should things like professional degrees count as wealth? They cost money to acquire, and produce income.