At Volokh Conspiracy, Steven Calabresi: Taxes on Wealth and on Unrealized Capital Gains Are Unconstitutional. The post describes an amicus brief filed by Professor Calabresi, Professor Gary Lawson, and former Attorney General Edwin Meese in Moore v. United States (the pending Supreme Court tax case). From the brief's summary of argument:
The Sixteenth Amendment authorizes Congress to tax “incomes, from whatever source derived” without apportionment among the states. Unrealized capital gains are neither “incomes” nor “derived” within the original meaning of the
Amendment. Both popular and legal dictionaries from the years around the ratification of the Sixteenth Amendment confirm that point. So does the amendment’s context and this Court’s near contemporaneous decision in Eisner v. Macomber. All evidence demonstrates that the original meaning of the Sixteenth Amendment is the commonsense one: realization is a precondition for income; money must come into the hands of a taxpayer in order to be taxable “income.”
The Ninth Circuit took a different, unprecedented view. The court of appeals concluded that realization is not a precondition for income, and so the Moores could be taxed on unrealized gains in wealth. That rationale is not limited to the Moores, or to the MRT the court applied. Rather, under the Ninth Circuit’s analysis, investors might be taxed on their unrealized capital gains in their Vanguard funds or their stock portfolios. Moreover, homeowners might be taxed on their unrealized capital gains in their houses and land. The Ninth Circuit is the only federal court of appeals to so hold. This Court should reverse and restore the original, commonsense meaning of the Sixteenth Amendment.
The American Revolution of 1776 started as a tax revolt. The Framers at Philadelphia knew that a constitution which gave Congress the power to enact a general wealth tax would never have been ratified. So the Framers gave Congress a general power to levy indirect “Taxes, Duties, Imposts and Excises,” but expressly forbade direct taxes unless they were
apportioned among the states according to the census. The Framers correctly anticipated that indirect duties, imposts, and excises would be the preferred route for federal taxation because there is always an element of voluntariness when one buys an imported good which is subject to a tariff, pays a sales tax on the purchase of a commodity, pays a use or excise tax on a luxury item like a carriage, or pays a gift or an inheritance tax by giving property. The taxpayer can always avoid the federal tax by not buying an imported good or an item subject to a sales tax, by not using a carriage, or by not making a gift or will. A tax on unrealized capital gains is not a tax on a transaction initiated by the taxpayer. It is essentially a wealth tax, which is precisely the kind of head or capitation tax for which the Constitution requires apportionment.
A tax on the Moores’ unrealized gain in wealth cannot be considered an indirect duty, impost, or excise. Rather, it is a direct tax. And that requires an apportionment among the several states according to the census, unless excused from apportionment by the Sixteenth Amendment—which it is not.
For these reasons, the tax assessed on the Moores is unconstitutional.
As regular readers know, I think this argument is plausible on its face, but I'm interested in the argument by defenders of the tax that federal law at the time of enactment defined "income" to include unrealized gains. If that's unambiguously true, it seems a major problem for the originalist challenge to the tax. On a quick look, I did not see anything in the brief that addressed this issue, which I found somewhat surprising.
Posted at 6:36 AM