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Notes -
I still have one case left to give thoughts on from Thursday, and all five from Friday. Here's one of each.
Moore v. United States
7-2. Opinion by Kavanaugh, signed onto by Roberts and the liberals. A concurrence by Jackson. Concurrence in the judgment by Barrett, signed onto by Alito. And a dissent by Thomas, joined by Gorsuch.
The question here is about the constitutionality of taxation. The specific context is from the tax cuts and jobs act of 2017, in the mandatory repatriation tax (MRT), wherein individuals were taxed for (undistributed) income of the foreign corporations that they owned shares in.
A handy summary I ran across of the various opinions:
Some relevant tax background: in the United States, there are two types of taxes: direct and indirect. Roughly speaking, direct taxes are taxes on things, indirect on transactions. The Constitution says that direct taxes cannot be passed by Congress unless apportioned among the states by the states' population. This turns out to be inconvenient, as most types of direct tax, like property taxes, do not scale purely with population, so such a tax would need to have different taxes at different locations. Hence, why there's no federal property tax, and taxes of this kind in general are avoided. Indirect taxes, on the other hand, only need to be uniform between states. This is much easier and more natural to do. Additionally, the 16th amendment authorizes taxation of income from whatever source.
The Moores argued two claims at the lower levels: first, that the MRT is a direct tax, because it taxes unrealized income. Second, that the retroactivity of the tax violates due process. But at the supreme court, they only argue the first issue.
Kavanaugh argues that the income is definitely realized, as it has been realized by the corporation, so there's no need to address whether realization is necessary for an income tax. Rather, he argues mainly about attribution. There's a long history to some things being taxed "on a pass-through basis," where income is attributed to individuals, regardless of whether it has been distributed to them. One example is in partnerships: the individual partners are taxed on them, rather than the partnership itself. Kavanaugh argues that this is just that, and that the Moores don't make any convincing case that this law is different from other taxes that they acknowledge are constitutional. Kavanaugh emphasizes also the limitedness of this decision more than once, saying that they rule only on "(i) taxation of the shareholders of an entity, (ii) on the undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity itself has not been taxed on that income. In other words, our holding applies when Congress treats the entity as a pass-through," and makes very clear that he is not here addressing about several other sorts of taxes, that the government had made arguments that they would be fine, such as a wealth tax.
Jackson, concurring, writes to argue that there are several further steps to striking down a tax, were that ever to happen: first, they would need to show that realization is necessary, (which she thinks is wrong, as that isn't in the text of the 16th amendment, and argues that the wording there was broad enough), and secondly that the tax was a direct tax, which she also interprets narrowly. She also argues that the Court should limit itself, pointing to the backlash over Pollock (which had classified some sorts of income taxes as direct) and the passing of the 16th amendment as an instructive lesson.
Barrett, joined by Alito, concur in the judgment. They argue that the Sixteenth amendment requires realization, when it says "derived from any source," means the same time by derived as what realized means—both are used when talking about "profits from capital." Barrett then argues that they have not realized income from their shares—"they have not 'derived' income from their shares because nothing has come in." She argues that the government is wrong in its argument that a tax on unrealized gains would be fine, like looking at a property's appreciation, because the person hasn't actually received the value yet, and the market could still change things before they actually receive any benefit from it. But the corporation they owned shares in did realize that income. Barrett argues from there differently than Kavanaugh did, though, saying that what is actually happening in the precedent cited, is that the past cases "allow Congress to disregard the corporate form to determine whether the shareholder received income in substance, if not in form."—that is, Barrett thinks that whether it's allowed to be taxed does not depend as much upon what structure it's legally in, but what structure it's functioning as, so in the case of foreign corporations set up as tax shelters, for example, it's fine to attribute and tax the shareholders of them. Barrett argues that attribution is limited constitutionally, due to the Due Process clause, and also in the 16th amendment, and that were that not the case, it could be abused. (There's an example involving Ford trucks that I don't follow.) But she declines to actually try to work out what the exact boundaries should be, since no one brought it up adequately. She agrees with Kavanaugh that the MRT (what's being ruled on) is pretty much the same as subpart F (what the Moores argued was fine and different). And so, the Moores haven't persuaded, and that's that.
Thomas dissents, with Gorsuch (EDIT: not alone, contra what was said above), because the taxes have not been realized. He also rejects attribution. He goes on a lengthy exposition on the history of taxation in relation to the Constitution, from the time of the articles of confederation, through to the passage of the 16th amendment. It's good, and of the cases I've read over the past few weeks, it's the single thing most worth reading more broadly speaking. He argues for a fairly narrow reading of what the 16th amendment does. He argues that Pollock revised the meaning of direct and indirect taxes, disagreeing with the civil-war era consensus (where only head taxes and land taxes were direct) and connected incomes to the source of those incomes—they would be direct or indirect if taxation upon the source would be direct or indirect. The 16th amendment then removes the source component, and makes it always indirect. Thomas agrees that realization is required, for the same reasons as Barrett. Thomas rejects the arguments the majority made on behalf of attribution, though in several cases for different reasons than Barrett does. He comes to roughly the same conclusion as she does (though she had chosen not to lay down any clear rule): "At most, the cases cited by the majority demonstrate that Congress may attribute income to the entity or individual who actually controlled it when necessary to defeat attempts to evade tax liability." Thomas argues that Subpart F is different MRT, because Subpart F deals only with income in that year, whereas the MRT does not care whether the shareholder had the corporation at the time of the earning, and does not really have a good reason for it to be considered income. He declines to say whether it is unconstitutional, but does think that it is meaningfully different. Thomas rejects the consequentialism of the majority in their mentioning the large amount of tax revenue that would be lost.
The 7-2 does not reveal what the true division of the court is on these questions. Barrett and Alito are quite close in their views to Thomas and Gorsuch. Kavanaugh and company are a bit further, because they endorse an attribution standard. Jackson clearly has a much broader view of what taxation should be allowed, compared to Kavanaugh who made very clear how limited this ruling was in what it allowed.
It was also interesting to consider that the government was attempting to push the ability for them to bring about future taxes. I found Barrett and Thomas more convincing myself, but I am glad that the majority made clear that this is not inviting taxes on unrealized gains.
From Friday:
Smith v. Arizona
9-0, opinion by Kagan, joined by Sotomayor, Kavanaugh, Barrett, and Jackson, and in part by Thomas and Gorsuch. Thomas and Gorsuch each wrote an opinion concurring in part. Alito wrote an opinion concurring in the judgment, which Roberts joined.
This case is about the 6th amendment, specifically the confrontation clause. The accused in a trial has the right to be confronted with the witnesses against him. This case is about experts, specifically, an absent lab analyst. Some chemicals were analyzed to be drugs, the analyst was unavailable for the trial, so someone else answered questions, following the notes. Kagan argues that it's testimonial, and that it's hearsay (is relevant for the truth), and therefore the confrontation clause applies. Gorsuch and Thomas both aren't sure that it's testimonial.
Thomas would not have the court look at the "primary purpose" of each statement, as Kagan had suggested, but rather would refer it to being about it being a solemn declaration, referring all the way back to Queen Mary of England. Yes, before the colonies. Making the appropriate rule whether it's similar in solemnity to that.
Gorsuch wants a better opportunity to consider what it means to have it be testimonial, and isn't a fan of the "primary purpose" test recommended by Kagan.
Alito, joined by Roberts argues against the opinion. He talks at length about how, up until several decades ago, experts used to have to couch everything in hypotheticals, and how that was horrible for a bunch of reasons. The Federal rules of evidence made things much better, with instructions to the jury instead to ignore portions of things, or only apply testimony to a given purpose. He sees this as at risk of leading back to hypothetical-land, and would prefer to lean on instructions to the jury. He also would affirm that not all testimony is hearsay, or for the purpose of the truth of the facts involved.
I'll be back sometime later, with the other four from Friday.
My main man comes through again! “Collectivists hate this one weird trick.”
I’d love a thorough unpacking of his opinion in this case. Where might I find it without having to sign up for something?
Well, you can just read it, as it's only thirty pages or so, and those are pages with large margins. I linked it at the start of the comment, but here it is again. It's the last one.
I imagine scotusblog has also summarized the case, but that would be something like the length I had, not an in depth analysis.
I just noticed your flair is relevant. How does the fairtax proposal work?
Thanks for the PDF! Here's a summary of the FairTax proposal.
America's current income tax system is a vast and arcane compromise between taxing economic activity to pay for necessary services which enable that activity and finding unescapable means of confiscating the wealth of those who can most afford to see it gone in order to help those without the opportunities the rich have had. Thus, it ends up
By being produced in a jurisdiction in which income is taxed, every product and service has some dollar amount built into its price which ends up in the hands of the government, that is, in the hands of the well-pensioned union of taxmen of the IRS. The hamburger I purchased today cost me $11 of my own post-tax income, and some 20-30% of that $11 is "embedded taxes":
Each of these individuals is at risk of underpaying the government, at which point men with guns will come to their homes and take them to a holding cell.
Imagine if, instead of having three hundred million potential tax cheats to monitor and prosecute, the government revenue service only had some two to ten million, all of them business owners and accountants and none of them laborers.
Imagine all IRS agents going into retirement and the Sixteenth Amendment riding off into the sunset, never to be seen again, all replaced by an automatic and easy-to-comprehend tax system which is the fairest ever devised by men.
Imagine if you paid the same amount for goods and services, paid the "embedded taxes" you were already paying for, but no money came out of your payroll for taxes.
Imagine never being at risk of tax fraud, not even for investments or selling your own property.
Imagine getting a monthly tax refund of 100% of the taxes you've paid the government.
The FairTax proposal has six moving parts:
The last part, the prebate, is what keeps this consumption tax from being regressive. The middle class buy more due to a more expansive lifestyle, and the investment class buy a huge amount more; they'll pay a lot more to the government than $300 each month, but both get the same flat $250-$300/mo. prebate. The 1% of the 1% might not even bother registering for such a relatively miniscule rebate, and the government gets to keep it. Meanwhile, it would be a source of direct income to the homeless and indigent, who could sign up for a bank account with their FairTax registration and direct deposit.
There are lots of arguments against the FairTax, but most of them are based on misunderstandings of one of the six moving parts above. I've collected exactly three cogent arguments against, which is a lot less than any other system, even Georgism.
(On a slight tangent, excluding groceries from sales taxes is surprisingly regressive.)
One thing that comes to mind is that is would distort the allocation of labor towards less productive activities that were exempt from tax (such as repair of an existing house) as compared to one that was subject to tax (such as building a new house).
The services of the contractor repairing the old house would be FairTaxed, as would services on old cars, tailoring of old clothes, and tenant remodeling for business suites in old business buildings. It’s only tax-free if you buy the thing and repair it yourself.
Also, why would repaired items be considered less productive? They use less resources to be restored to the same utility as a new thing. Unless you’re talking GDP-style metrics?
How could that work? You said resold items are exempt.
I can sell my house to the plumber tax free, he can work on it (of course, paying FairTax on everything he buys from HomeDepot) and then sell it back to me for more, again, no tax. The difference in price minus the difference in supplies he purchased is the value-add from his skilled labor, which is untaxed.
They do use less resources, but they use much more labor per unit output because they don't have nearly the economies of scale. Or if you prefer more formally, labor is a kind of resource which is in a substitute relationship with physical resources.
This is not to say that repairing is bad! In many cases it makes sense, it's only that the tax system shouldn't have such a strong preference because it's distorting.
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First off restoring old things can be less productive than new things. They have components that don’t fit with new standards and working around them would be low productivity. Also factories are just more productive than one off jobs. So it’s not just GDP-style metrics.
Second, you would have a whole issue dealing with what’s new and what’s old. In an extreme example say your building a 70-story condo building and replacing an old bodega. Is it new or old if you build the new connecting and on top of the old? So you say that’s obvious new and that is maybe easy to define but you would have a huge scale of nuances to figure out the line. Which in other areas we deal with but there is going to be a gamification line.
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My thoughts and concerns on the points:
Alright, some overall thoughts. The main thing here seems to be a shift of everything to a sales tax on the selling of new goods. This is distortionary, but I don't know that I mind lowering consumption? I would want to know how you'd handle imports of foreign goods. Also, to be clear, would this be packaged with a lowering of the welfare state more generally? How much would the markets move to accommodate the new tax structure, and how would that affect the revenue raised? I'd probably want to look up what economists think before having any definite opinion on this.
A national sales tax, fair tax, VAT whatever you want to call it seems economically more efficient.
I am not sure if it would lower consumption or not.
The big issue with it is it’s impossible to swap systems. I guess you could do it gradually but that probably just ends up being the government gets more revenue and spends it. Older people who paid income tax on savings get hurt with a new tax on consumption.
A lot of it feels like our roads system. Since we built everything for cars it’s difficult to swap back to trains and walkable. We can debate which is better but we have everything designed for cars now. If America got nuked, we did post-apocalypse for a few decades and then we’re back in growth mode we might choose different design routes.
But since system switch is hard it leaves these tax ideas mostly to the academics.
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I'm confused about (2). Different people in different situations are subject to different degrees of withholding, many of which concern protected class information. How then would the business offer the right wage, while maintaining privacy?
I'm also confused about stock stuff. Currently we have a hard to understand regime, but one built on some core and logical principles, like how realized and unrealized gains work, and related to how stock and passive incomes aren't the same as wage incomes. I'm not really sure how this system addresses these tensions, if at all. Is rent/housing considered a sale or service? The retail paradigm does not capture all significant financial transactions.
How does this differ from VAT tax approaches favored in the EU? Isn't this basically the same idea, implemented in a more confusing way?
And finally, couldn't this be classified as just a super-duper sales tax? If we swap our tax reliance from recurring revenue sources to one based almost exclusively on economic activity, wouldn't economic downturns be devastating, and create huge problems in how government services are provided?
Don't feel the need to respond to each or any of these, but I am curious.
I think federal taxation is already almost exclusively on economic activity? It only really uses indirect taxes (See what I'd written on Moore v. United States). That's different from the states, though.
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