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PaperclipPerfector  5mo ago (text post)   25678 thread views

Culture War Roundup for the week of December 4, 2023

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(Mods, let me know if I need to delete this and repost in Small Questions Sunday.)

The US Supreme Court (SCOTUS) hears Moore v United States today. According to SCOTUSBlog, at issue is "Whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states". Since that's not very helpful, I'll quote The Atlantic's summary instead:

The story of Moore starts in 2017, when President Donald Trump signed the Tax Cuts and Jobs Act. The law aimed to minimize the incentive for U.S. corporations to hoard money overseas by reducing certain taxes on foreign earnings. But, in exchange, U.S. investors would have to pay a onetime tax on accumulated foreign profits going back several decades—the so-called transition tax. Charles and Kathleen Moore are among the Americans affected by the change. In 2006, they invested $40,000 in KisanKraft, an Indian company owned by a friend. They allege that they never received any payments from the company because all of its profits were reinvested. The transition tax nevertheless stuck the Moores with a $15,000 tax bill based on the company’s retained earnings. The Moores countered that the transition tax is unconstitutional because it exceeds Congress’s power under the Sixteenth Amendment. That amendment, ratified in 1913, explicitly empowers Congress to tax incomes. But the Moores argue that unrealized gains aren’t income at all.

Mother Jones, NPR, CBS, and Foreign Policy (of all the friggin' places) are running articles breathlessly proclaiming DOOM! for the US tax code, or at least the ability of Democrats to pass wealth tax laws. This Forbes article seems to be a pretty good explanation of what's at issue but I'll admit that I'm not well-versed enough in tax law to understand the full ramifications of what a Moore victory would mean for the ability of the federal government to raise revenue. On the other hand, I can't say I'm sad about the idea of a wealth taxes getting a bullet to the head. What am I missing or not considering as I read about this from the various outlets?

Adam Unikowsky, partner at Jenner & Block and great legal blogger, wrote about this a month ago

In my view, the Supreme Court should answer this question the following way: “The tax is unconstitutional. We have no idea where the line between constitutional and unconstitutional taxes lies, but wherever that line is, this tax crosses it. Our holding should not be construed to cast doubt on any other provision of the Internal Revenue Code.”

Legal purists will blanch. In addition to the unaesthetic nature of such a holding, it seems incoherent. How could the Court determine whether a tax crosses the constitutional line without deciding where the line is? Or put another way: implicitly, by holding that one tax crosses the constitutional line and other taxes don’t, the Court must have some idea of the line’s location. Why not just say where it is?

Answer: because any attempt to adopt a verbal formulation of the constitutional line is bound to be misleading and embroil lower courts in confusing disputes. Moore puts the Court into a zugzwang situation: whatever test it adopts will make things worse. The best way to do no harm is not to adopt a test at all.

Moore illustrates that judges are less like philosophers and more like plumbers. Their role is not to think deeply and elucidate the law’s True Meaning, but instead to provide practical solutions to concrete problems. Sometimes the judicial task is best performed by announcing and applying general legal rules. But not always.

...

... All of this is almost a reason to support the government’s position. But not quite. I’m going to get dewey-eyed here … we do live under a written Constitution that judges must follow through thick and thin. And there’s simply no way that money earned by a company 30 years ago is a taxpayer’s “income” merely because the taxpayer has bought some stock. The opinion just won’t write.

That’s why I want the Moores to win without the Supreme Court saying anything about the legal standard beyond that the Moores win. Circling back to where I started: the Moores win because this isn’t income. Exactly where the line between income and non-income is, I do not know. Don’t get your hopes up, tax shelter designers.

The whole post is a good read

How could the Court determine whether a tax crosses the constitutional line without deciding where the line is?

Same way Potter Stewart could determine that The Lovers wasn't pornographic.

I liked the post but I think it's unlikely the court does anything like this, for both pragmatic and legitimacy reasons. Unikowsky is basically asking the court to rule "the Moores win this case but the inevitable subchapter F litigants lose thier cases. Not for any reason we can articulate but because we think it's the right outcome." An important part of the law and adjudication is predictability. Scotus doesn't just announce rules for determining outcomes because they love rules. They do it so the government and citizens have some notice about what laws the government may pass or when citizens rights may be violated.

Nah SCOTUS looooooves punting. See the Oracle v. Google case, where they refused to answer the root question of whether or not API definitions are copyrightable.

They could even reuse the line from Bush v Gore: "Our consideration is limited to the present circumstances, for the problem of [what is and is not income] generally presents many complexities."

I mean, that's because their ultimate ruling was that Google would win even if the API definitions were copyrightable. That seems quite different to what Unikowksy is proposing here.

Oral argument transcript here if anyone else wants to read it.

After perusing it myself I think the court is likely to rule for the government. Either 5-4 (with Kavanaugh and Barrett joining the liberals) or 6-3 (if Roberts joins as well). I think the holding will be on narrow grounds. Probably taking the governments line that the income was realized by someone (the foreign corporation) and congress is merely attributing that income to the shareholders (as other pass-thru tax code provisions do). This sidesteps the more general hypothetical about taxing unrealized gains and avoids upending confidence in a bunch of existing tax code provisions.

All else equal, all wealth should be taxed equally (say, flat 1%/y) , not income from wealth. Current tax laws encourage bubbles and poor investing. Just buy a garbage bond or shitcoin and uncle sam will barely touch it, but god helps you if you invest in a company actually making money. And don’t give me the hard-luck grandma story.

It’s like a poll tax on wealth, and like a poll tax, it’s very tax efficient. The problem with income tax is that it discourages economically beneficial behaviour, like working or good investing. Every time you engage in it, the state wants a piece, and possibly, an even bigger piece, the better you are at it. So the state, counter-productively, eggs you on to be a bum and to stack your wealth under the mattress (ignoring inflation). Your lazy bum money should be taxed at least as much as superstar cancer-curing money.

All else equal, all wealth should be taxed equally (say, flat 1%/y) , not income from wealth. Current tax laws encourage bubbles and poor investing. Just buy a garbage bond or shitcoin and uncle sam will barely touch it, but god helps you if you invest in a company actually making money. And don’t give me the hard-luck grandma story.

Hmm - I haven't heard this take before. Let me do some quick math, courtesy of the Markowitz model. Suppose you have two investment options:

  • stocks that returns Norm(A, B)
  • risk free interest rate: i

Let e be your risk aversion and let x be the the proportion of your portfolio you are investing in stocks

U = xA + (1-x)i - exxB

dU/dx = A - i - 2exB

x = (A - i) / (2eB)

Capital gains scales returns by k and variance by k^2 (where k = 1 - tax_rate):

x = (kA - ki) / (2ekkB) = (A - i) / (2ekB)

As taxes go up, k shrinks from 1 towards 0, which makes x increase. Therefore, capital gains taxes cause increased risk tolerance.

A wealth tax reduces returns by k:

x = ((A-k) - (i-k)) / (2ekkB) = (A - i) / (2ekB)

This is the same, so a wealth tax doesn't affect risk tolerance.

It’s like a poll tax on wealth, and like a poll tax, it’s very tax efficient.

I don't think this can be true. The chief academic argument against capital gains taxes is that they impose a 100% tax on consumption in the far future, which is maximally distortionary. The same is true of a wealth tax.

The problem with income tax is that it discourages economically beneficial behaviour, like working or good investing.... the state, counter-productively, eggs you on to be a bum and to stack your wealth under the mattress (ignoring inflation). Your lazy bum money should be taxed at least as much as superstar cancer-curing money.

I personally think that if society had no welfare, a flat income tax would be either not distortionary or push people to work more. Note: historically people worked much more and (e.g.) wages being 4x lower because your country is poor is equivalent to a 75% flat tax today.

I have an elegant mathematical model illustrating this result, but I think I've force-fed this forum with enough math already.

Let e be your risk aversion and let p be the the proportion of your portfolio you are investing in stocks

Where is “p”? I’m gonna need a template for these equations, like an article who uses similar ones (the wikipedia markowitz model wasn’t helpful). Or more letter definitions.

As taxes go up, k shrinks from 1 towards 0, which makes x increase. Therefore, capital gains taxes cause increased risk tolerance.

So a 99 % capital gains tax results in everyone investing in stocks?

The chief academic argument against capital gains taxes is that they impose a 100% tax on consumption in the far future, which is maximally distortionary.

I call bullshit on that. A 100% tax on everything right now is more distortionary.

I personally think that if society had no welfare, a flat income tax would be either not distortionary or push people to work more.

But we have welfare, and the income tax isn’t flat. You’re very theoretical today.

Note: historically people worked much more and (e.g.) wages being 4x lower because your country is poor is equivalent to a 75% flat tax today.

Ignoring the motivating effect of hunger, of course.

Where is “p”?

Sorry. I ended up using "x" in the actual math. I've edited the post to be correct

I’m gonna need a template for these equations

You might find the Modern portfolio theory article more useful or even his original paper (scihub). If you want a quick explanation

  1. We can approximate any reasonable utility function using a second-order Taylor series
  2. We can approximate investments as normal distributions
  3. The expected value of a 2nd order polynomial normal random variable, X, equals (up to linear transformation) E[X] - e * Var[X], where e is a parameter determined by the 2nd order polynomial and the normal distribution
  4. Therefore, we can approximate the problem of "choose an optimal portfolio" as "choose the portfolio that optimize E[X] - e*Var[X]
  5. Once we've made that leap, we can use the properties of expected value and variance to convert (a) a vector of expected values and (b) a covariance matrix of returns into an optimal portfolio

Obviously, the usual caveat applies: all models are wrong, some are useful.

[ Edit: in case it wasn't clear, I'm saying a wealth tax is better than a capital gains tax in that it doesn't distort risk-taking while a capital gains tax does]

So a 99 % capital gains tax results in everyone investing in stocks?

Yeah. Note: people would probably save less, but what the people are saving would be invested in stocks rather than bonds in this model.

I call bullshit on that. A 100% tax on everything right now is more distortionary.

Sure. I mean that according to ivory-tower theory, even a 1% capital gains tax now is equivalent to a 100% tax on far-future consumption. A 1% tax on labor income or current-consumption doesn't have that pathology.

But we have welfare, and the income tax isn’t flat. You’re very theoretical today.

Right, my main point is that, contrary to textbooks, I don't think poll taxes are actually non-distortionary. I think a poll tax (and its opposite: welfare) is distortionary.

Ignoring the motivating effect of hunger, of course.

What do you mean?

A wealth tax reduces returns by k:

x = ((A-k) - (i-k)) / (2ekkB) = (A - i) / (2ekB)

I think there’s an error here. The k subtracts itself in the numerator, so the two k’s stay in the denominator, unlike in the cap gains equation.

in case it wasn't clear, I'm saying a wealth tax is better than a capital gains tax in that it doesn't distort risk-taking while a capital gains tax does

Vast layers of misunderstandings keep peeling off, yet your position remains as inscrutable as ever. Didn't you (wrongly, see above) determine that the equation was the same : ' x = (A - i) / (2ekB)' for both? So why is risk tolerance increased for cap gains tax and not for the wealth tax?

I want to distort risk-taking, I think we would all tremendously benefit from a 90% reduction in financial risk aversion of the average citizen. By the lights of MPT, shouldn’t we collectively expect a higher return on all our investments if risk aversion went down?

Yeah. Note: people would probably save less, but what the people are saving would be invested in stocks rather than bonds in this model.

I think that discredits the model. They’re not going to take all the equity risk for 1% of the equity premium, they’re supposed to be loss averse.

Sure. I mean that according to ivory-tower theory, even a 1% capital gains tax now is equivalent to a 100% tax on far-future consumption.

This is a useless extrapolation theory.

I think a poll tax (and its opposite: welfare) is distortionary.

Welfare is not the opposite of a poll tax, it’s a progressive tax that goes into the negative. Regardless, how is a poll tax distortionary?

I think that discredits the model. They’re not going to take all the equity risk for 1% of the equity premium, they’re supposed to be loss averse.

I never responded to this. The point you're missing is that a 99% capital gains tax also reduces the risk. An investment that returns 10±30% now returns 0.1%±0.3%.

That's not what risk is. If the company he invests in goes bankrupt, that's not helped by the 99% capital gains tax. That is the risk he cares about, not the variance on his profits. But let's not get into that.

It does. He then gets to deduct those losses on his taxes, resulting in recouping 99% of his lost value.

I want to also take this opportunity to wax poetic on financial markets and risk.

Most economic risk in society has nothing to do with financial markets - think things like

  • risk regarding whether a particular company will become more or less profitable
  • risk regarding commodity / mineral prices
  • home price risk due to the natural housing market

etc.

Finance, as a market, serves two purposes:

  • It connects money-havers with money-needers
  • It connects people who are poorly positioned to take a risk with those better positioned to take that risk

So, for instance,

  • a wheat farmer is poorly positioned to accept the risk that the price of wheat will crash, so they buy risk protection via options or futures from investors (ditto for mining operations)
  • a startup founder takes enormous risk starting a company - a venture capitalist takes some of that risk by allowing the founder to, say, draw an income in the meantime
  • a family needs a house and will probably be able to afford it (the future is never certain! maybe all earners will be paralyzed in a car accident) - the bank assumes some of that risk when they lend the family money via a mortgage

Why are the investors better positioned to take these risk? Two reasons: they have money (duh) and they can diversify by buying a basket of somewhat independent risk.

So, when functioning properly, financial markets reduce the cost of risk to society.

That being said, "functioning properly" is key and, due to the principal–agent problem and plain old human error, there are significant sources of imperfection.

Much of that imperfection probably pushes investors to take too much risk: generally speaking if a trader does well, they make oodles of cash, while if they do poorly the worse they can be is fired. Note, however, that absent a specific scenario (see next paragraph), that cost of that risk is still paid by the company funding the trader, so it is internalized to the company and we, as the broader society, don't really need to care too much about it. When a trading firm's net worth hits zero and it closes, we still don't really care - the costs of that firms' sins were laid at that firm's feet.

The specific exception to this is when a company's net worth hits negative, which can only happen if a firm takes leverage. Even in leveraged firms, this is not too common, since as any firm worth its salt will start winding down positions automatically as its overall wealth goes towards zero (the specific terms are "funding risk" and "unwinding"). Robinhood, for instance, will do this for you automatically (or, rather, force you to do it).

Even if a firm's net worth hits negative, someone was lending the firm money and that firm bears the costs, so, again, you and me (as outsiders) shouldn't really care. So, the actual exception is a firm that

  • uses leverage
  • does not use unwind strategies (either because they're incompetent or because the market is highly illiquid like housing)
  • poses a systematic risk and so gets bailed out at society's cost

This gives us the three things to target in seeking solutions:

  • discourage leverage through regulation and taxes (e.g. don't allow the interest rate deduction)
  • legally require the implementation of unwind strategies (I don't remember if this is generally legally required, but is implied for banks via reserve requirements)
  • have stringent requirements for firms large enough to impose a systematic risk (e.g. the Volcker Rule)

But none of these imply a wealth tax or capital gains tax. Neither tax policy discourage leverage (borrowed money is deducted from wealth and, at least today, margin interest is tax deductible). Neither have any bearing on unwind strategies or target firms that impose systematic risk.

I think there’s an error here

Yeah, my bad. It should read

x = ((A-k) - (i-k)) / (2eB) = (A - i) / (2eB)

So, my conclusion remains: the wealth tax doesn't affect the allocation into stocks, while the capital gains tax does. This also explains your second point: the two conclusions are no longer the same.

I want to distort risk-taking, I think we would all tremendously benefit from a 90% reduction in financial risk aversion of the average citizen.

Do you believe venture capitalists and the startups they fund are net-bad for society? I think they're (a) net-positive and (b) the platonic ideal of high-risk-taking, so I don't think we want to discourage risk-taking in general. I do think you can argue that leverage should be discouraged more, but I don't think a capital-gains-versus-wealth tax is the appropriate tool to do that, even if you insist on using taxes rather than regulations. For instance, you can remove the interest tax deduction.

By the lights of MPT, shouldn’t we collectively expect a higher return on all our investments if risk aversion went down?

I don't see how MPT implies this. This sounds like you're "reasoning from a price change" - i.e. what matters isn't that risk is reduced - what matters is how it was reduced.

This is a useless extrapolation theory.

Hence my use of the term "ivory tower" :p

Welfare is not the opposite of a poll tax, it’s a progressive tax that goes into the negative

Just to make sure we're on the same page - you're saying welfare is a "progressive tax that goes into the negative". A poll tax is a fixed sum demanded regardless of income.

You can decompose any tax system as the union of

  • some amount of welfare you give to a household that makes zero income
  • some function that, given a dollar amount tells you the marginal tax rate

In this sense, welfare and poll taxes are opposites:

  • Welfare is when the government gives money from people with no income.
  • Poll taxes are when the government takes money from people with no income. (albeit with some implication that the marginal tax rate is always zero)

how is a poll tax distortionary?

Well, if you want math - suppose my utility function is

U = ln(wage * labor) - labor

dU/dLabor = 1/labor - 1

∴ labor = 1

With a poll tax

U = ln(wage * labor - poll_tax) - labor

dU/dLabor = wage/(wage * labor - poll_tax) - labor

∴ labor = 1 + poll_tax / wage

So, in this model, a poll tax would cause me to work more.

If you want a story: consider someone who barely makes enough to survive - a poll tax would force them to work more hours to continue surviving.

And it keeps going, more layers of misunderstandings.

x = ((A-k) - (i-k)) / (2eB) = (A - i) / (2eB)

So, my conclusion remains: the wealth tax doesn't affect the allocation into stocks, while the >capital gains tax does. This also explains your second point: the two conclusions are no longer the same.

So your math was incorrect, but luckily you interpreted it wrong, so by being doubly wrong you went all the way to being right again?

And what happened to the k’s now, why did you remove them from the denominator? You previously used them to justify “As taxes go up, k shrinks from 1 towards 0, which makes x increase. Therefore, capital gains taxes cause increased risk tolerance. “

By that logic, and assuming the equations are worth a damn, the wealth tax also causes increased risk tolerance. More even, since you have two k’s in the denominator going to zero.

Do you believe venture capitalists and the startups they fund are net-bad for society? I think they're (a) net-positive and (b) the platonic ideal of high-risk-taking, so I don't think we want to discourage risk-taking in general.

Another misunderstanding. Man, I am in favour of risk, from the beginning. Between low-risk/low-return and high-risk/high-return, I choose high every time. Personally, and macroeconomically. I said people should be less risk averse, ie, take more risk. I could rail against insurance companies and the giant societal loss they represent all day. They prey on the irrational fears of people to the tune of trillions of dollars annually. But that’s besides the point.

To be 100% clear, no, I do not believe VC and startups are net-bad for society at all.

what matters isn't that risk is reduced - what matters is how it was reduced.

I am not talking about a reduction in risk, but a reduction in risk aversion. An investor with less risk aversion (ie, willing to take more risk) could expect higher returns, correct? I’m just applying this to all investors in the economy.

Just to make sure we're on the same page - you're saying welfare is a "progressive tax that goes into the negative". A poll tax is a fixed sum demanded regardless of income.

Yes, and yes.

Your progressive tax depends on your income. When your income is low enough, instead of paying the tax, you get welfare. So it’s the ‘negative side’ of the progressive tax. Your progressive tax becomes a payment to you.

The poll tax is not distortionary, because nothing you do matters. You can work or not work, you’re still on the hook for the same poll tax, 100 dollars or whatever. The progressive tax( including welfare), takes from you if you work and gives to you if you don’t. Whether that is good or bad is another issue, but it definitely distorts your behaviour more.

So, in this model, a poll tax would cause me to work more.

Any tax in this model is distortionary. We’re talking relative distortionaryness.

If you want a story: consider someone who barely makes enough to survive - a poll tax would force them to work more hours to continue surviving.

That’s what I referred to above : “ignoring the motivating effects of hunger”.

Another misunderstanding

This whole section is my bad. My reading comprehension clearly needs work. Mea culpa.

So your math was incorrect, but luckily you interpreted it wrong, so by being doubly wrong you went all the way to being right again?

No. I did the math on a piece of paper correctly and copied it wrong.

And what happened to the k’s now, why did you remove them from the denominator?

Because a wealth tax doesn't affect the variance of post-tax returns.

By that logic, and assuming the equations are worth a damn, the wealth tax also causes increased risk tolerance.

I've been arguing this whole time that

  1. A wealth tax doesn't affect risk tolerance
  2. A capital gains tax reduces risk tolerance

So it does, indeed, follow that, relative to a capital gains tax, a wealth tax increases risk tolerance.

Any tax in this model is distortionary.

Incorrect. A flat tax (without any poll tax or welfare) is non-distortionary in that model.

Edit:

U = ln((1 - tax_rate) * wage * labor) - labor

U = ln(1 - tax_rate) + ln(wage) + ln(labor) - labor

dU/dLabor = 1/labor - 1

so labor = 1

all independent of tax_rate

More comments

In principle I'm open to almost all kinds of taxation - I was in favor of georgism before it was cool, for example (though I'm tentatively against it now that it is cool, so I guess you may call me a tax code hipster?).

It just so happens that wealth is absolutely horrible to tax in practical terms. The state can only meaningfully tax anything for which it has easily accessible bookkeeping. We already expect companies to have accounting software & books anyway, which means income & sales are easy to tax. For wealth, only investment & bank accounts are easily accessible. So in practice we have two extreme outcomes of a wealth tax (and a spectrum of combinations inbetween):

a) only bank accounts and investments are taxed, maybe in addition to some reasonably easy to estimate forms of wealth such as land ownership. This will strongly incentivise, as you put it, lazy bum money, and other difficult to access forms of wealth.

b) Every individual will have to do extensive bookkeeping of all their belongings, and the state will regularly need to check homes (in fact, any place where valuable assets might be hidden) to make sure that these books are accurate. Aside from the extreme inefficiency of forcing people to keep books of their belongings, this is utterly impractical for the state as well. In practice there will probably be arbitrary limits on both individuals and goods - you only need to keep book about your belongings which are worth >X / only individuals who have a net-worth >Y need to keep books. But this will again strongly encourage people to move their wealth into assets that are below these lines / to get themselves below the line.

Either way, even if a wealth tax might be efficient in a world with a theoretic omniscient tax AI, I have yet to see an actual implementation that isn't horribly distortive AND impractical.

Why's Georgism gone sour for you? I've only been tracking it loosely and casually, not to the point of going hunting for counter-arguments to it, and I'm certainly not qualified to generate them on my own.

I think that its central claim, namely that it's not distortive since you can easily separate out "true" land value and development, is straightforward false. In practice, what we call land value is extremely dependent on the development around it. As a simple toy example, a neighbourhood group that works together to keep the streets clean increases the land value of their own houses, which in a pure georgist world would actively impoverish them.

That said, directionally speaking I'm not entirely opposed to moving into the direction of more georgism, I'm just opposed to going full george. Right now for example we have a questionable NIMBY feedback loop where real estate owners have an incentive to block any development nearby even if it does not actually bother them just to drive up their own land value. This means that you often have a small number of dedicated NIMBYs that genuinely are bothered by something, and a larger associated block of people that are tentatively on their side just because when in doubt, more land value is always better for you. A well-chosen land tax around 1 or 2 % might balance this out a bit better ( assuming 5%+ as full georgism). But you then also need to be dedicated to this tax. In the worst case, you grant extremely common exceptions so that everyone is paying land value taxes from de facto something like 20 years ago, and then it's strongly in everyones best interest again to drive it up.

Similarly, there are some decent georgish models for resource extraction such as the norwegian petroleum tax / oil fund system. I'm also in favor of those.

This will strongly incentivise, as you put it, lazy bum money, and other difficult to access forms of wealth.

People who park their money in a completely unproductive manner are already granted total tax- exemption. The state can’t possibly incentivize them more. Plus the destruction of income/capital gains tax would obviously incentivize successful kinds of investment.

Every individual will have to do extensive bookkeeping of all their belongings

They already do if they file for income tax. Impractical? Somewhat, like most changes. That’s all small stuff, the status quo is far more “horribly distortive”. Most of the capital base of society is effectively stored in a dark room instead of being put to productive use. The minority of actually working capital is being bled dry so that working class grandma doesn’t ever have to sell the family castle.

Never underestimate the capacity for things to get worse! Currently, the most pragmatic place to park your money is on a bank account. This is not the most accessible & liquid place for the greater economy, sure, but it also is far from unproductive. In most countries, the banks can use it for investment or lending with decent leeway. A wealth tax can easily make people bury their wealth figuratively in their backyard (hell, maybe even literally), where it is actually entirely inaccessible.

Current tax laws encourage bubbles and poor investing. Just buy a garbage bond or shitcoin and uncle sam will barely touch it, but god helps you if you invest in a company actually making money.

I'm confused. Are rich people who choose to deliberately put their money in suboptimal investments because of the capital gains tax?

Just so. You have a million dollars. You can either:

A) put it in a highly productive, socially beneficial company, which produces 100 k/y profits

B) stack it under your mattress, buy a huge house you don’t need, or a very secure (read: lame) bond

The tax is 33 % on profits. The alternative wealth tax is 10k/y.

Under an income tax regime, your personal profit is A: 67k and B: 0 .

Under a wealth tax regime, your personal profit is A: 90k and B: -10 k

Of course B is also safe, that’s why it’s so popular. A results in a societal gain greater than 100k/y, B close to zero. For a more productive economy, people should be encouraged to choose A.

Taxes on wealth have to be one of the worst ideas wrt to efficiency and improving the economy. Wealth fluctuates wildly throughout a year, so calculation is very hard, and this rule would make investing in nonpublic and non liquid assets be double taxed, because you would be taxed on them, but would have to go through massive efforts to pay the taxes by executing instruments to liquidate some equity.

Who has 99% of their income generating power tied up in private equity? The illiquid unassessed capital is invisible to the rest of the economy and therefore wastes productive capacity. If you don’t believe in price signals, might as well have communism.

Double tax/it can be inconvenient: yes, but so are ordinary taxes. You’re comparing this replacement tax to a hypothetical tax with no downside. But the taxes it replaces are actually worse. They impair the wealth generation of everyone, not just a few special cases. Imo you’ve got status quo bias, and you’re all annoyed that this argument supports the democrat side.

You’re comparing this replacement tax to a hypothetical tax with no downside.

Well I don't see any upside to a wealth tax. There is the massive calculation problem. My dad used to have a small business who's purpose was selling other small businesses. And the calculation problem is enormous. One company can look almost exactly the same as another until you are at analysis part 3 or 4. And we are going to do that for all equity every year? John Smith over here running Smith's Recycling is going to figure out, on a yearly basis, what his (the only recycling business in town by the way, so no comps, this isn't real estate) how much its worth to have a recycling business? And, remember these valuations aren't simple or static. Recycler A who sells in 2009 might have gotten 1/5 what B does 2 towns over in 2010 (real example). And its another case where we are forced to trust tax agencies to be fair and unbiased in the application of the law. No, I don't think I have that trust.

Well I don't see any upside to a wealth tax.

As an investor who deals in highly productive capital (as opposed to less productive cash, houses or bonds), your father would be among the people who benefit the most from a wealth tax. It would be a laughable sum compared to the capital gains tax and corporate tax he pays. So imprecision barely matters. And that kind of business is the worst example possible when it comes to calculation problems. Besides, increased liquidity and transparency about how much those mom-and-pop businesses are actually worth would be economically very beneficial, though that is admittedly my personal instinct.

As an investor who deals in highly productive capital (as opposed to less productive cash, houses or bonds), your father would be among the people who benefit the most from a wealth tax.

Your example makes no sense. If you can buy an investment in capital it doesn't produce static returns like "$100k/year in profits." If it does, its purchase price will go up significantly and approach the cost of buying an equivalently risky bond. What a more realistic scenario of investing in a new company would look like:

Year 1: Invest $1 Million. Pay $10% taxes on that. Y/Y Profit: $-50k. Pay $100k in taxes. Now we have to sell 10% of the company (to who is an important question I might add). Year 2: Your stock still has paper worth 900k. Y/y profit: 0k Pat 90k in taxes. Sell equity again. Year 3: $Paper stock worth $810k. Y/Y Profit 100k. Your Share, 81k, Your taxes. 81K. Finally breaking even.

It's not difficult to find companies with a P/E of 10.

My wealth tax was 1%/y yours is 10%/y. A 10% wealth tax is obviously confiscatory and destroys the economy.

Who has 99% of their income generating power tied up in private equity?

Charles Koch?

All those bubbles generate substantial tax revenue for the government. Those people buying shitcoins generally go bankrupt. And it can be quite hard to ever take advantage of prior capital losses as tax write offs. In a pure Ponzi scheme like say bitcoin you have smart traders trading the bubble and generate a lot of gains and a ton of idiots generate losses. All those gains the government collects taxes on while the losers often enough never get to monetize those losses. Even if it’s not smart traders making money but random some take profit and random others buy tops that still generates on net a bunch of tax revenue.

The punishment for bad investment is losing your investment. All those Gme bros lost all their money. And some quant trading firms probably scalped a ton of profits in the vol.

Personal opinion I would say taxing unrealized gains is illegal according to the letter of the law.

But it is legal to tax earnings at a different organization level. I shouldn’t have to pay taxes because I own Apple stock and they have earnings but Apple can be taxed on their earnings. The difficulty is figuring out the regime of tax shelters and taxing those things correctly. Which is admittedly hard but I think doable.

Taxing unrealized gains from an economic perspective has a lot of issues. If markets had clear forecasts of future income streams and could then apply proper discount rates then taxing unrealized gains could maybe work. But markets aren’t anywhere close to that efficient.

One example I’d give is I had a friend who was a former employee of a start up. It got acquired by a SPAC. She had a paper networth of $3 million and change (at the spac $10 price). By the time she had the ability to sell she had like $60k. Her wealth tax would have been like 500k and she would have negative gain on that whole thing of 440k.

[info about the ruling]

You have context.

Mother Jones, NPR, CBS, and Foreign Policy (of all the friggin' places) are running articles breathlessly proclaiming DOOM! for the US tax code, or at least the ability of Democrats to pass wealth tax laws.

You have analysis.

This Forbes article seems to be a pretty good explanation of what's at issue but I'll admit that I'm not well-versed enough in tax law to understand the full ramifications of what a Moore victory would mean for the ability of the federal government to raise revenue. On the other hand, I can't say I'm sad about the idea of a wealth taxes getting a bullet to the head. What am I missing or not considering as I read about this from the various outlets?

You have an opinion and a jumping off point for the discussion.

(Mods, let me know if I need to delete this and repost in Small Questions Sunday.)

Not necessary. From my perspective you have all the important parts required for a top level post. I'm mod tagging my comment just so people have some insight into how I judge top level posts. Having Context, Analysis, and a Jumping off point / Opinion is enough for a top level post. CAJO.

Having Context, Analysis, and a Jumping off point / Opinion is enough for a top level post. CAJO.

Perhaps too strained, but "unraveling" rather than "analysis" results in a superior backronym.

Analysis, Context, Hook, Own Opinion.

ACHOO.

Anything to cajole good discussion I suppose.

I'll come out with a prediction that Gorsuch will bite the bullet and be willing to simply follow the letter of the amendment clearly and obstinately. He is, after all, the originator of the buttfore test from Bostock, and the preeminent justice who actually thinks the federal government has to follow the treaties it has signed to the letter. If anyone will read the amendment and declare unrealized gains obviously not income and therefore not taxable, it's him.

Roberts will squish and try to legislate from the bench, saving the way congress currently taxes despite it being clearly unconstitutional and Neil saying so, but that's an easy prediction. It's in his nature, it's what he's there to do, and it's why Bush put him on the bench. Maybe he'll try to steal the opinion from Gorsuch, who would absolutely savage any existing structures if they counteract the letter of the law.

I'm sure all three opposition women will join Roberts in allowing a wealth tax, but I'm at least hopeful Kagan will have a clever excuse. I never expect cleverness from Sotomayor or Jackson, just party-line votes as a good foot soldier.

However, the rest of the conservative wing is up in the air. Kavanaugh is another squish like Roberts, and Barrett seems to be leaning the same way on anything not abortion. You'd figure Alito and Thomas would be pleased to prevent Congress from reaching its tentacles into another pot of gold, but they're also most amenable to business interests, and if the tax code would be flipped on its head due to a decision, I can see either of them ruling to delay disruption somehow in a narrower ruling.

Anyone else care to personally prognosticate?

What’s odd is that the court took this up in the first place. First, tax cases aren’t popular at the court. Second, there was no circuit split. Third, the amount at stake was small.

It seems to me there are five votes to say 965 was wrong (why else would they take this case). But there are maybe a few ways to get there.

First, they could put teeth back into the rule against retroactive law. That is, they could say there can be a deemed distribution but such distribution could not cover earnings in a prior year (ie congress had a chance to tax that earnings but choose not to do so).

Second, they could limit any deemed distribution to taxpayers that control (taxpayers here own less than 50% and therefore don’t control).

Third, they could somehow try to distinguish between individuals and corporations. Doing so is hard in light of Moline Properties.

In short, I expect the Moore’s to win but narrowly in a way that does not upend the entire US international tax system.

My typical court-model is pretty consistent with what you laid out there, with the typical shape being:

  • Consistent left, shitty or irrelevant reasoning: Sotomayor and Jackson
  • Consistent left, sharp wit and compelling arguments: Kagan
  • Centrist institutionalists: Roberts, Kavanaugh, sometimes Barrett
  • Consistent right: Thomas, Alito, sometimes Barrett
  • Maverick: Gorsuch

So, basically, I model the court as three left-votes, two-three centrist votes, two-three right votes, and one true wildcard (that does tend right). This is a very different model in practice than the 6-3 "conservative majority" that is treated as a stylized fact; the actual balance prevents originalist and textualist understanding from obliterating stare decisis altogether, even when the precedent is garbage.

With that model, I will guess that Roberts will guide a 5-4 or 6-3 majority that carves out a narrow decision that prevents expansion of taxation powers in the most egregious fashion while not rolling much back. Gorsuch may well pen a concurrence that's much more strident and Thomas may join him with a "yeah, and also we should burn all this shit down" opinion. Sotomayor or Jackson will pen a leftist screed that amounts to, "but if the conservatives are right, this would stop a lot of taxes that we like!" opinion. Kagan will dutifully concur, but decline to write an opinion because the reasoning is too sketchy.

While i might quibble about the precise breakdown of each justice, Your model of the court largely matches mine and i agree with your prediced outcome.

I will guess that Roberts will guide a 5-4 or 6-3 majority that carves out a narrow decision that prevents expansion of taxation powers in the most egregious fashion while not rolling much back. Gorsuch may well pen a concurrence that's much more strident and Thomas may join him with a "yeah, and also we should burn all this shit down" opinion.

Is there anything that can be done to prevent such perfidy from the Chief Justice? Is it possible that we have six votes that these people don't owe taxes, but only Kavanaugh and Roberts in the narrow decision while still writing for the majority? I'll admit I don't know the specifics of determining opinions and which opinions are legally relevant and which are just eloquent essays.

While I am not an expert and am under the impression that this is all determined by tradition rather than statute, my impression is that the answer with the current system is that Roberts just has complete (and formally legitimate) power to select the author of the controlling opinion:

Despite the chief justice's elevated stature, their vote carries the same legal weight as the vote of each associate justice. Additionally, they have no legal authority to overrule the verdicts or interpretations of the other eight judges or tamper with them.[8] The task of assigning who shall write the opinion for the majority falls to the most senior justice in the majority. Thus, when the chief justice is in the majority, they always assign the opinion.[10] Early in his tenure, Chief Justice John Marshall insisted upon holdings which the justices could unanimously back as a means to establish and build the court's national prestige. In doing so, Marshall would often write the opinions himself and actively discouraged dissenting opinions. Associate Justice William Johnson eventually persuaded Marshall and the rest of the court to adopt its present practice: one justice writes an opinion for the majority, and the rest are free to write their own separate opinions or not, whether concurring or dissenting.[11]

Given the fragile nature of Supreme Court composition, this may not even be a bad thing. I personally find it incredibly frustrating that we wind up with rulings that expound on various implausible theories for why only the tiniest change is legitimate, but I acknowledge that an aggressive handling of such matters could lead to court packing or an outright Constitutional crisis. Roberts apparently evincing cowardice may well reflect him being unwilling to throw away long-run advancement of his preferences for the sake of short-run correctness.

So, the members of the Court vote at conference, and the senior member of the majority side gets to assign the opinion (Roberts, as Chief, automatically has seniority, which is relevant if he's in the majority). The justice so assigned then writes an opinion, and so does any other justice that wishes to. Those opinions are circulated, and each other justice signs on to whichever opinion they choose, in whole or in part. Often, these opinions--especially the assigned-majority opinion--go through multiple drafts, which generally affect how much the other justices are willing to endorse. Once the process works its way out, you get final drafts of the various opinions, each with a holding (A wins/B wins) on the outcome of the case, and with the full or partial endorsements of the other justices.

After all of this is done, you can evaluate which side won, and which opinion holds the authority of the Court. If a majority of the participating members of the Court vote that side A wins, then that side wins. If there's a tie (possible with recusals or other absent votes), then the lower court decision stands. In terms of reasoning that holds precedential effect, look for any section in any opinion that is endorsed by a majority of the Court voting in the case. In particularly split cases, there may not be a reasoning that commands a majority at all, in which case the precedent is "side A wins, no specific reasoning controls."

Hypothetical: a case is heard, and at conference the vote is 6-3, with the three liberal women in the minority. Roberts assigns the opinion to himself. Following the drafting process, the Chief's opinion (A wins) is joined by Kavanaugh; Sotomayor writes for herself, Kagan, and Jackson that B should win; and Gorsuch writes for himself, Thomas, Alito, and Barrett that A wins, but on a different rationale than Roberts. In this case, A wins; there is no controlling rationale; but lower courts would give the most weight to Gorsuch's opinion as it has the most support, even if it isn't binding precedent on them.

The justices usually try to make sure that the hypothetical above doesn't happen, because it's not very useful guidance to the lower courts. It can happen, though, if the split between Roberts/Kavanaugh and Gorsuch et al. is sharp enough. In most cases, you'd at least get (for instance) Kavanaugh endorsing Section IIIA of Gorsuch's opinion, in which case you'd read "GORSUCH delivers the opinion of the Court as to Section IIIA, joined by THOMAS, ALITO, KAVANAUGH, and BARRETT, and an opinion as to sections I, II, IIIB, IIIC, and IV, joined by THOMAS, ALITO, and BARRETT...etc." The key phrasing is "the opinion of the Court" vs. "an opinion."

It's true that all of the detail above is the product of centuries of tradition, but the core is rock solid--the Court is a body made of equal-voting members. A simple majority speaks for the whole. If the Chief cannot get four supporters, he's just another guy with an opinion, but if any member of the Court gets four others to agree, they speak for the Court itself.

(Roberts is rather famous for his Obamacare decision in which zero members of the Court joined his opinion in full. Four members joined part of it, and the other four joined the rest, so his full opinion had five votes in each part, but they weren't the same five votes.)

Anyone else care to personally prognosticate?

Not me, but I appreciate the analysis. Aside from the most obvious party line predictions, I don't have any special insight into the supreme court. They seem mostly like a black box to me.

Any thoughts on the recently adopted code of conduct for the supreme court?

And did they ever find that leaker?

My read is broadly similar to @Walterodim's up thread.

Jackson and Sotomayor are affirmative action hires who are basically there to be two guaranteed votes for the Left.

Kagan is consistently left leaning but strikes me as much sharper and more of an independent thinker than the above two.

Roberts is a squishy centerist who's first loyalty is to the status quo, and thats why hes the chief. As others have said, "his role is to grease the wheels"

Kavanaugh is more right leaning than Roberts, but similar in that he seems to be an institutionalist first.

Barret and Alito are consistantly Right leaning. With Alito serving the same role that Kagan does for the opposing camp.

Thomas is an obstinate "Boomercon" and typically serves as "the voice of the normies" on the court. Usually votes with the conservative faction but has been known to cross the aisle on occasion.

Gorsuch, broadly right leaning, but a reflexive contraian first and foremost.

I'm much less kind to Alito. He's a right wing hack, every bit as nakedly political as Sotomayor, just for the other side. Mostly agreed on the rest.

I have rough impressions of the personalities of the justices. Gorsuch as an obstinate contrarian, Kagan as the only liberal who can write, Roberts as there to grease the gears and make sure nothing much happens too fast, and so on. I'm still waiting on Barrett and Kavanaugh to justify themselves, and thus far I'm not impressed. Kavanaugh, especially, seems like Roberts' lackey more than anything else, almost how Thomas was characterized as Scalia's lackey for many years.

I haven't read much about the code of conduct in particular, just that there is one, but in general I think it's a cudgel to be used against the conservative justices, because that's how its implementation has been characterized. I have a low opinion of Propublica and they were one of the main drivers of negative reporting on, for example, Thomas. It's important to know that while Congress can determine the size of the Supreme Court, they can't actually do much else in terms of regulation. Reading up, it appears they just used the same code of ethics (not code of conduct) that was already used in lower courts, and just formally adopted it for the Supreme Court. This prevents Congress from squawking for a time, but the problem wasn't the lack of code of ethics, the problem was and is 6 republican appointees, and that problem still goes in search of solution. This is a defensive measure, and it might work, but I don't have high hopes of anyone being principled or consistent.

Except Neil Gorsuch. I don't particularly like his rulings, but by god the man has brass balls and is willing to swing them around when the law is clear and the judges are specious. He will burn down the law on technicality and sleep soundly having done his job well. Maybe one day he'll recuse himself over something that none of his colleagues would even consider, and we'll say it's the code of ethics come home to roost.

I haven't read much about the code of conduct in particular, just that there is one, but in general I think it's a cudgel to be used against the conservative justices, because that's how its implementation has been characterized.

You don't explicitly lay out how a code of conduct that applies to everyone equally is biased against Conservative justices. Is it because you think conservative media outlets are incapable of doing investigative journalism? That only Conservative justices are likely to violate said code of conduct? That everyone is corrupt, but the public/congress will selectively pressure corrupt Conservative justices?

If it came out that, say, Soros was buying houses and fancy vacations for some of the liberal justices I'd anticipate Fox News, talk radio and the Matt Gaetz' of the world would convulse in a collective orgasm and talk about it nonstop for the next three months. Do you disagree?

The restorative justice of Soros-backed district attorneys has killed people and mainstream media only cares when it turns into a horse race.

I can’t fathom any media outlet running a feature on people that would be alive today but for lax prosecutions.

You don't explicitly lay out how a code of conduct that applies to everyone equally is biased against Conservative justices.

I thought I was clear: the only reason anyone cares about a code of ethics is because of politicized reporting smearing conservative justices. Therefore, the code of ethics itself is but a cudgel to be used against said justices.

Is it because you think conservative media outlets are incapable of doing investigative journalism?

Yes, this too. I don't think Propublica is worth the paper its printed on, and I don't trust them to tell me anything bad about Democrats, or anything good about Republicans.

If it came out that, say, Soros was buying houses and fancy vacations for some of the liberal justices

Yeah, but it won't come out, because that's not the media landscape that exists in reality. In reality, the Hunter Biden laptop full of incriminating evidence is pre-bunked as a non-story and literally every single major media enterprise gets with the program in lockstep fashion. I wouldn't anticipate Fox News doing much about, since last I've checked they're just as much at war with the Republican base as any Never Trumper has ever been. That's one reason why Tucker is out.

the Matt Gaetz' of the world would convulse in a collective orgasm and talk about it nonstop for the next three months

He'd be the only one talking about. Him, us here, maybe /pol/, maybe /r/conspiracy, and other fringes of the internet. No major media would cover it seriously, instead the story would be how Republicans are melting down over racist conspiracy theories.

I don't know what world you're living in where you can model outcomes as you have. There just seems to be so much counterevidence that it feels nostalgic, like you expect Walter Cronkite to walk through the door and gently tell you all the things you need to know.

To be clear, "the media" are, at their core, just a ton of very smart and driven people who also happen to be, mostly, progressive. Nothing stops driven conservatives from reporting on the misdeeds of liberal justices, other than a lack of conservative reporters (as in Trace's earlier post), or a lack of misdeeds.

I think it's entirely possible the liberal justices haven't done anything similarly bad? Thomas's actions are specific things that might or might not have happened. I could see an alternate history where Thomas didn't do what he did. I can see a history where the liberal justices and thomas both did similar things. So I can also see a history where Thomas did that and liberal justices didn't do something similar. Like, Bob Menendez chaired Foreign Relations, and he happened to be a democrat. It totally could've been a Republican who did that, but it wasn't.

(also: Liberal Media didn't seem hesitant to report on Menendez's misdeeds. Obviously supreme court justices are more of a sore spot, but it's a comparison)

I thought I was clear

I'm sure you do.

the only reason anyone cares about a code of ethics is because of politicized reporting smearing conservative justices. Therefore, the code of ethics itself is but a cudgel to be used against said justices.

And the only reason we care about the Hatch act is that we might someday use it to coerce conservative congress members to resign. Just look at George Santos! We should probably do away with ethics rules in the House. No doubt the IRS is just going to be used to go after conservatives citizens, so we probably ought to dissolve that. The printing press has just been used as a cudgel against conservatives since the 16th century, and the rule of law has fucked conservatives since Hammurabi so we should probably do away with those as well.

I guess the cops are okay. They probably won't go after conservatives.

What you're being unclear about is any kind of broader position beyond being salty that a conservative justice is catching heat for something that, were the shoe on the other foot, you'd be just as happy to complain about. Are you just against any kind of neutral rules so long as what you think of as a biased media could leverage it against a prominent conservative? Are you specifically against any kind of code of ethics for the Supreme court, and if so, how is that different from any other example of ethics/rules that (at least on paper) apply equally to everyone? Is there some kind of underlying principle, or again, are you just salty that your ox got gored?

Yeah, but it won't come out, because that's not the media landscape that exists in reality. In reality, the Hunter Biden laptop full of incriminating evidence is pre-bunked as a non-story and literally every single major media enterprise gets with the program in lockstep fashion.

You say it wouldn't come out, and then give an example that...everyone knows about. The Hunter Biden laptop story was happily trumpeted through conservative talk radio, breitbart, Fox news, boomer facebook and wherever else conservatives get their news. It was broadly discussed in the NYT and plenty of other mainstream outlets as well.

No major media would cover it seriously, instead the story would be how Republicans are melting down over racist conspiracy theories.

Fox News, literally the most-watched news channel would cover it. As would conservative talk radio, which is how Trump supporters get their news. Randos in rural Idaho aren't getting the Times delivered to their doorsteps.

Walter Cronkite

Who's that, like, a tiktok influencer?

No doubt the IRS is just going to be used to go after conservatives citizens

About that…

You don't explicitly lay out how a code of conduct that applies to everyone equally is biased against Conservative justices.

There is no such code of conduct. A leftist justice could have an absolutely egregious conflict of interest, and the New York Times and Washington Post and NPR and CNN would carry water for them. Sure, conservative media would complain, but no one cares what they think anyway.

No, there is a code of conduct. A conservative judge could have an absolutely egregious conflict of interest and fox news, conservative talk radio and boomer facebook would carry water for them.

But nobody cares what the conservative media thinks. That's the essential asymmetry. A conservative judge could be pressured into recusing himself by the NYT/WP/CNN/NPR (directly or indirectly); a leftist judge cannot be pressured by the conservative media.

I think this is pretty transparently untrue, especially if you spend lots of time around retirees. There is a significant population who cares about OANN or Fox or whatever. Some of them are also wealthy, opinionated, and like those college-campus kids in that they have lots of time to spend on politics.

The much-maligned unelected judges are reasonably well insulated from the opinions of these voters. That cuts both ways, though, and I don’t see how conservative media is categorically different from its liberal or centrist counterparts.

It’s also rather hard to prove a negative. Did you have a leftist refusal to recuse in mind?

Tens of millions of people care what conservative media thinks, and they vote accordingly. A conservative judge couldn't be pressured into recusing themselves by the media.

More comments

Gorsuch as an obstinate contrarian

I don't know if Gorsuch is a contrarian so much as determined to force Congress to actually legislate and actually abide by the legislation it has previously written.

He's contrarian in that I don't think he respects precedent when precedent is in conflict with the plain meaning of the law as written. Most justices will still respect precedent to some degree.

Kavanaugh is largely responsible for the major questions doctrine. I also expect BK to be very key in the Chevron decision upcoming (his concurrence in Kisor was different that Roberts in some subtle but important ways).

According to SCOTUSBlog, at issue is "Whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states".

Among the many things that have culminated in me having an incredibly low opinion of the ethics of the legal profession, I think obviously dishonest readings of plain text is number one. The Sixteenth Amendment reads, simply:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

I flatly don't believe that anyone sincerely thinks that this means that Congress can tax unrealized gains. At issue would be the meaning of the word "income", but again, I do not believe that anyone would have considered "income" to include your house appreciating in value or a share of a company you purchased becoming more valuable (or merely being subject to inflation). The process to amend the Constitution is well established, if you want to collect taxes on unrealized gains, you obviously need to amend it, but because that wouldn't prove politically feasible, a bunch of liars lawyers claim that "income" has a novel meaning that absolutely no one involved in passing the Sixteenth would have believed.

Prediction: the Supreme Court rules that the current case of taxation falls under constitutionally enshrined tariffs but that wealth taxes broadly are unconstitutional.

I flatly don't believe that anyone sincerely thinks that this means that Congress can tax unrealized gains.

Levine points out at least one case (Original Issue Discount) where you pay income tax on interest you won't receive until maturity on a bond as if you have received it. However, I don't think the fact that they're doing it means it's actually in accordance with the Constitution.

There are zillions of cases where there is phantom income. OID is but one. See 951, 951A, 1293, 475.

Then there are the more elective provisions like S Corp’s or partnerships.

That also has the feature of a defined outcome determined at the beginning of the investment. That doesn't apply to the plaintiffs in this case, because there's no fixed term and no fixed return.

I can easily see leaving that alone while preventing taxation on anything that doesn't meet those criteria.

The bigger issue is that the investors invested under regime X. The CFC earned money. Then years later Congress decided to have a deemed distribution of the earnings earned back in time. That is, there was a change in law that basically changed how that historic income was taxed. I could see a fifth amendment issue there.

The Supreme Court has already decided numerous times that retroactive taxes don't violate the ex post facto provision (which is in the body of the constitution for Federal law).

Yes but why not overturn since those rulings are bullshit.

Conservatives, by definition, won't overturn a string of decisions going back to 1798 (Calder v. Bull)

To be clear, I’m not suggesting ex post facto clause (pretty clear that’s a criminal law only issue). Instead fifth amendment. The law there is less settled (though a 90s case would need to be reinterpreted)

I definitely expect a narrow ruling; I don't know whether it will for or against the plaintiffs, but I expect it won't open the door too widely to more broad-based wealth or unrealized gain taxation, nor sweep away huge sections of the tax code.

I definitely expect a narrow ruling; I don't know whether it will for or against the plaintiffs, but I expect it won't open the door too widely to more broad-based wealth or unrealized gain taxation, nor sweep away huge sections of the tax code.

There are two obvious ways of ruling for the IRS in this case without saying that a wealth tax is constitutional:

  1. Rule that income of a corporate entity imputed to a shareholder is "income" for the purposes of the 16th amendment. This isn't a stretch - it is how S-corps, LLPs and LLCs are already taxed. This is the main argument in the IRS brief, so it is actually the most likely result.
  2. Rule that the transition tax is a tax in lieu of an income tax, and therefore justified by the combination of the 16th amendment and the Necessary and Proper clause. This is essentially the same argument as in Wickard and Raich that justifies treating everything as interstate commerce. So it is a very obvious way of giving the IRS a broader win while still leaving the wealth tax question open.

Reading the executive summaries of the briefs, I think this is an easy case and the IRS wins 8-1 or 9-0 (Thomas possibly dissenting) on the basis that the transition tax is an income tax. Given the clear precedents for imputing corporate income to shareholders, Moore is trying to reverse-ferret into an argument that the transition tax is a wealth tax (as opposed to a tax on undistributed corporate profits) because it potentially (not in Moore's case) taxes the shareholder on profits that were earned before they bought the shares, and is therefore a tax on share ownership.

My read of this case is:

  • overreaching litigant gets deservedly benchslapped by the 9th circus
  • 9th goes overboard by saying that there is no realisation requirement at all (as opposed to the correct position that the realisation at the corporate level is imputed to the shareholder). This confuses the law and creates the false impression that a federal wealth tax is constitutional
  • SCOTUS take the case in order to clear up the mistake, but aren't going to change the law and rule in favour of Moore - they just want to bash some sense into the 9th and are using Moore's overenthusiastic litigation as a tool to do so.

Analogizing corporations to S Corp’s, LLCs, and Partnerships entirely misunderstands the Code.

There is a fundamental difference between pass through taxation on one hand and corporate taxation on the other. When it comes to a partnership, the theory of the case is that while there are entity level aspects it is an aggregate of the partners (ie the partners themselves are earning the income) and therefore there is no entity level tax. An LLC merely defaults to partnership taxation but of course with both partnerships and LLCs taxpayers can elect to treat them as corporations.

Contrast this with a corporation which is seen as a separate entity for US tax purposes. See Moline Properties. This entity is taxable on its income. Only in extremely limited situations are it’s shareholders taxable on its income (generally related to earnings of a foreign corporation — these rules are necessary to prevent a taxpayer from creating holes in the US tax system).

And the key constitutional point is that a taxpayer by and large has a choice what form to operate in. If he wants to be subject to phantom tax (but only one layer) then using a pass through. If he doesn’t want to be subject to phantom tax, then use a corporation (but now subject to so called double tax).

So it is easy to say “this is a slam dunk case” if you aren’t familiar with the august and long standing differences between pass through taxation and corporate taxation.

As with most things finance, Matt Levine might not be the absolute best, but he is the most hilarious (...and is pretty darn close to the best in any event).

archive links have been broken for me lately. I get stuck in "i am not a robot" tests indefinitely. Firefox, adblocker, and password manager. No idea which of those is screwing things up.

Here is the raw link: https://www.bloomberg.com/opinion/articles/2023-12-04/whose-income-do-you-pay-taxes-on

I'm not sure the state of the paywall, any free articles available; I always view his column on archive. Good luck!

The Supreme Court decided this issue a long time ago, with respect to imputed rent (no, you can't tax it; "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived", but not "no source at all, just shit we pulled out of our ass"... OK the Supreme Court didn't quite put it that way)

So once again we have an issue where the best possibility is the status quo is maintained. The worst is a massive increase in taxing power -- the power to tax not only money in motion but money at rest (perhaps with the fig leaf that it was once in motion). Most likely is probably some decision on the narrow issue that answers nothing but opens the door for more taxes.

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