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Liberal Democrats have long argued for the U.S. to tax wealth rather than just income, to ensure that wealthy Americans who earn their wealth from real estate, stocks, bonds and other assets pay more in taxes.
On Thursday, that dream survived a Supreme Court threat, but barely.
The narrow ruling means that a series of plans to use the tax code to close the huge gap between the wealthiest Americans and everyone else will likely live on in Democratic Party campaign plans and official budget documents for years to come.
The wealth tax proposal wasn’t directly before the court on Thursday — the justices were considering the constitutionality of a new tax imposed under former President Donald J. Trump that applies to certain income earned by overseas corporations. But by hearing the case, the court could have preemptively ruled a federal wealth tax unconstitutional.
But the result remained the same and liberal groups celebrated their victory.
“By preemptively ruling that the federal wealth tax is unconstitutional, the Supreme Court could have taken the worst kind of activist stance,” Amy Hanauer, executive director of the Institute on Taxation and Economic Policy, which supports higher taxes on corporations and the wealthy, said in a statement. “It is to the Court’s credit that it did not do so.”
But the case also offered a glimpse into the legal battles over a wealth tax, in various forms, if Congress were to impose one. In the case, four justices were staunchly opposed to a wealth tax, and two more were skeptical.
“This is a nuanced decision,” Jo Bishop Henchman, vice president of the National Taxpayers Coalition, which opposes wealth tax proposals, said in a statement Thursday. But she added that the “court is clear that it does not open the door to a wealth tax.”
The ruling in the case handed down Thursday nominally concerned the constitutionality of a tax included in the tax reform law that President Trump signed into law in 2017. The justices upheld the bill by a 7-2 vote.
The larger debate surrounding the decision, laid out in an 83-page brief by several justices, was whether Congress has the power to tax the wealthy.
President Biden and other leading Democrats have pledged to pay for big new spending plans like expanding health insurance and Medicare for All in part by taxing the net worth of the wealthiest Americans. They would go beyond traditional government efforts to tax income from work and investments and instead make billionaires pay taxes on the gains their portfolios generate on paper.
Many conservatives argue that these plans would violate constitutional limits on the types of taxes the federal government can impose. Some groups have asked the court to uphold this argument, declaring in advance that a wealth tax cannot apply to lawmakers.
The question mainly comes down to what counts as “income” – is it money that goes into a bank account, such as a salary or the sale of stocks, or is it so-called unrealized gains from assets that increase in value over time even if you don’t sell them?
Four conservative justices wrote in concurring or dissenting opinions on Thursday that unrealized gains don’t count as income, suggesting that a wealth tax is thus impossible. That was a near majority decision, and enough to alarm wealth tax supporters.
“It is clear that the four justices on the Supreme Court are fascinated by the influence of billionaires,” Morris Pearl, leader of Patriotic Billionaires, a group that supports higher taxes on the wealthy, said in a statement.
But the decision also laid out a path, albeit a narrow one, for a wealth tax. Justice Ketanji Brown Jackson, one of the Supreme Court’s liberals, essentially wrote a blueprint for government lawyers to defend a possible wealth tax in court, and a legal theory that justices could follow to uphold a wealth tax.
She questioned whether the Constitution requires income must be realized to be subject to federal tax and said courts should play a “limited” role in tax disputes.
Perhaps knowing that a wealth tax would tend to perform well in public opinion polls, she urged the justices to let the public resolve the debate.
If the case reaches the Supreme Court, the other two liberal justices are likely to side with Jackson. The likely swing votes would then be the two conservatives, Chief Justice John G. Roberts and Justice Brett M. Kavanaugh, who wrote the majority opinion for the Supreme Court on Thursday, which is peppered with references to what does and doesn’t count as “realized” income for tax purposes but explicitly rejects a position on the future of wealth tax issues.
“These are potential issues to consider another day, and I do not intend to address or resolve any of them here,” Justice Kavanaugh wrote.
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