INTERVIEW: David Gamage

David Gamage is a professor of tax law and policy at the University of Missouri School of Law. He previously taught at Indiana University, and also served as special counsel to the U.S. Treasury Department. Last year, he co-authored an amicus brief in support of the government in Moore v. United States, the Supreme Court case challenging the constitutionality of the Tax Cuts and Jobs Act's deemed repatriation tax. We spoke about the case on June 27.

So what's your big takeaway from this decision? Does it just preserve the status quo? Or are there some implications down the road that this decision could either cause or indicate?

The five justices in majority issued a narrow but strong decision that realized earnings at the entity level can be attributed to partners or shareholders, so long as they weren't already taxed at the entity level. So that is a strong, although very narrow decision. But most of the big questions weren't answered by the majority decision. We have some sense of where some of the justices stand at this point. But I think it's very, very likely that we will see future challenges.

To say a bit more about that. Assuming that readers know the basic parameters, what the challenge was, the Moores' case was to the transition tax rule as part of the 2017 Tax Cuts and Jobs Act, which taxed certain entity-level earnings and foreign corporations as part of moving from a worldwide to a territorial tax system. Some of the existing mark-to-market provisions or similar-ish provisions in the code are also realized earnings at the entity level attributed to shareholders or partners.

Partnership taxation seems safe. Some were worried that the court could effectively put all partnership tax into doubt. That seems not to have happened. But many of the existing mark-to-market provisions in the code, from the exit tax to various taxes on financial products that don't apply just at entity-level earnings, are not necessarily safe.

The five justices in majority opinion written by [Justice Brett] Kavanaugh did not rule on the question of whether the 16th Amendment has a realization test for what is income. Nor did they rule in any meaningful way about the excise tax cases, many of which precede the 16th Amendment, which uphold a variety of other forms of taxation, including the corporate income tax and estate and gift tax, what their status is today. So we are left with a lot more questions than answers.

Whereas the [Justice Amy Coney] Barrett and [Justice Samuel] Alito concurrence, that only narrowly was a concurrence, says that, in Barrett and Alito's view, there is a realization test for income, they would even apply it to realized gains at the entity level attributed to partners or shareholders, but with exceptions allowed for anti-abuse purposes. They only barely ruled in favor of the government, on the grounds that the petitioners hadn't met their burden of proof, meaning potentially other petitioners could challenge the transition tax. If their view had been a majority and might have won, Subpart F and many other provisions would be cast into doubt.

And then, of course, in dissent, [Justice Clarence] Thomas and [Justice Neil] Gorsuch would have struck down even this and potentially thrown much of the tax code into question. Former House Speaker Paul Ryan said a third of the tax code could be a doubt, and probably would be if the Thomas decision had become law. But what we have now is five justices rejecting either the Barrett-Alito view or the Thomas-Gorsuch view, but not ruling on anything beyond attributing entity-level realized gains to shareholders or partners.

Which means again, on the one hand, a bunch of existing tax code provisions that are mark-to-market are now in doubt and will likely be challenged. And we'll see what happens. And my guess is, most of those will probably survive, even under the reasoning of the Barrett-Alito decision. They could survive based on anti-abuse grounds. And I suspect there's a majority to uphold these provisions. But I'm not sure how much money or odds I put on that.

And then the question of some future possible wealth tax reform, or a comprehensive mark to market reform, as opposed to the partial targeted mark-to-market reforms that exist in prior law, are put in much more doubt. Some commentators are saying that the majority said that a wealth tax would need to be apportioned. That's not true. They said a property tax would need to be apportioned, which most commentators, including myself, agree on. A wealth tax of the Elizabeth Warren or Bernie Sanders style is not a property tax. So that's an important distinction.

That said, it seems very likely that there are five justices on this court who would strike down a Warren or Bernie Sanders-style wealth tax, a comprehensive mark-to-market tax like Senator Wyden's billionaire income tax reform. President Biden's intermittent income tax reform might be somewhat safer grounds than a wealth tax. The majority, very carefully, does not rule on such attacks one way or another. But reading the tea leaves, it seems like they're quite possibly five justices who would be inclined to strike down such a tax if enacted.

One observation that people have made is that the tax system as it currently is biased in favor of assets and people who own assets over people who earn income. First of all, do you agree with that, and is the Supreme Court headed towards making it impossible to change that bias, enshrining it in the Constitution?

There are a number of anti-tax groups, libertarian groups, and fellow travelers that, in my view, clearly want to enshrine a strong constitutional realization requirement to make it so that the income tax doesn't work with respect to those who have lots of wealth. Or those who can reorganize their economic affairs so the tax system treats them as though they were paid in wealth, as "co-investors," even if what they're really doing is getting paid for labor income. We're all aware of the tax world of lots of different ways to convert what economically we might think should be labor income, into capital gains, if realized, or untaxed asset appreciation, which then can be borrowed against. And the tax system, in my view, breaks down with respect to those of great wealth and creates lots and lots of problems. The Supreme Court, or at least some justices seem to be answering those calls from anti-tax libertarian groups.

This is partly why I regularly try to remind everyone that we only are debating, at the moment, what what Congress can do as a uniform tax versus an apportioned tax. It's very clear that Congress has the power to tax wealth, directly or in the form of appreciation. The only question is whether Congress has to do it in a uniform manner or has to do it in an apportioned manner. And, unfortunately, taxes as we have done them since the Civil War, there's a bunch of extra complications. There's no reason Congress is going to do an apportioned tax, if they can do it in a uniform manner.

But it's also, in my view, not that difficult with modern fiscal tools, today. The world looks quite a bit different than it did in 1900. We have massive, massive federal programs of revenue sharing with state governments– Medicaid, and others. There's complexities in apportioned tax, those complexities are pretty minor compared to the complexities involved in making Medicaid work. Medicaid is an extremely complex federal-state revenue sharing program. And it works. Some might disagree with it on other policy grounds, lots of us think it can be redesigned to be less complex and work better. But it definitely works. It's not impossible. It would be much, much, much easier to do an apportioned wealth tax or mark-to-market reform than something like Medicaid, which we have. So reminding everyone out there--conservative anti-tax groups, to the extent they press on this hard, may just get us to a world where we actually get a real wealth tax, in the future, apportioned. The Supreme Court cannot, at least through these provisions--at least through limiting the 16th Amendment, or the excise tax versus apportionment language--prevent Congress from taxing these things. These are not the documents that can actually prevent these forms of taxation. They can only place barriers in front of them.

If I'm understanding you right, you're saying the way to do apportionment in a responsible way would be to have it offset with other fiscal programs, that wouldn't be taxes?

I don't even know that such offsets are needed. The first step is, you can apportion. We've done it, five times before the Civil War. It would be much easier today with modern fiscal tools than it was then. The second step is how worried are we, if an apportioned tax has higher tax rates, on some things like say a residual tax on property, in poorer states than richer states?

My argument is, if that was the only federal government program, we should be pretty worried. It wouldn't make any sense to have higher rates for poorer states than richer states. But we have a whole bunch of different federal programs, many of which transfer money from richer states to poorer states. In fact, there's been a lot of complaints, say among the New York legislative delegation, that New York is paying too much in taxes, and Kentucky's paying too little in taxes. If you think that an apportioned tax would collect too much revenue from poor states, we have a whole bunch of tools to deal with that. And if you believe the New York legislative delegation, maybe it would be correcting an existing imbalance. I don't have a strong view on how much poor states should contribute to the federal fisc versus richer states. I'm not saying I agree with the New York delegation. All I'm saying is Congress can address this in a whole bunch of different ways, if it thinks that the balance is off. So the mere fact that an apportioned tax would change the balance shouldn't be a problem, because Congress can rejigger the balance a whole bunch of different ways.

I like doing an apportioned direct tax through a residual tax on property for several reasons. One is that was what was done in the 1798 direct tax, so we have a pretty good model. Two, every state in the country already has property taxes, so we already have valuation taken care of. A state level or local level valuation works for residual tax, because if valuation games are played, that just means the tax rate gets higher. And three, if a state thinks that the overall tax rate on property taxes for say, multimillionaires is too high, after the new federal apportioned tax, that's pretty easy for the state to do something about. All they have to do was reduce their existing state level property taxes for whoever's affected, if they want to. So I don't view it as a big problem, just extra sets of complications.

I guess people might say, that's a lot of work to do, just to get around what's almost a constitutional quirk.

Well, there's a question, why do we have different rules for excises, duties and imposts--sometimes called indirect taxes, although the term indirect tax isn't in the Constitution--versus direct taxes on property? And the answer is, the original Congresses and the Constitution Convention thought we needed a rule to prevent over-taxing certain states, and in particular, southern states were very worried that the northern states would tax slavery into oblivion. So for direct taxes on property, the rule is apportionment, so you can't disproportionately tax property. Of course, it was very clear you could tax slaves or slavery. All the original direct and indirect taxes did. That's why you needed a residual tax, so the fact that only some states had slaves and if you put a tax on slavery, it means that you have higher taxes on land value in the northern states. So that was the concern.

Then for things like, tariffs, the early precursors to income taxes, like whiskey taxes, things that were viewed as excise taxes, we didn't have that concern, because these were transaction-based, and instead, there's uniformity requirement. Now, in my view, it's absurd to extend the apportionment requirement beyond taxes on property itself. Things like local property taxes we have today. I think if you look at the constitutional history, even something like a Warren-style wealth tax should be safe. But I don't expect the Supreme Court to agree with that.

Why wouldn't a pure wealth tax be a tax on property? Isn't that what it is taxing?

Only the Pollock decision, which has been overturned, said that a tax that burdens property is a tax on property. In the earlier decisions, taxes on property are taxes on property itself. And the argument is exactly, we don't tax land value itself, or tax buildings itself, like local property taxes and taxes on slaves itself. Because these things are fixed geographically. These aren't a property of people, unless you're taxing the person itself. This isn't an activity like income, like sales. This is something that exists in a particular geographic place, and thus it makes sense to tie the taxation to an apportionment requirement instead of uniformity requirement, because it's a property. It has a physical location. A tax on net wealth, counting for liabilities above a certain threshold, and especially a tax on extreme net wealth, like the Warren or Sanders-style taxes, in my view is much more like an income tax. This is a tax on an economic measurement of a person, or activities engaged in by a person. For sure, ownership of property affects the tax base, as does ownership of things, producing income. But so long as we reject the flawed and overturned logic of the Pollock case, this is, in my mind, much more like the taxes that the original decisions and the Constitutional Convention wanted to impose uniformity requirement to, not an apportionment requirement. The history is very clear, the apportionment requirement was only meant for taxes on property itself. The existing analogs today are local property taxes. In Missouri, we have a property tax on vehicles. If there was a national-level tax on any of those things, taxes on a specific form of property itself, not net worth, then the apportionment requirement exists. And its logic makes some sense, but extending it beyond that, in my view, there's no purpose for it. It was primarily designed to protect slavery, or to stop disproportionate taxation of property that exists in only certain states. Not activities, and certainly not the economic characteristics of individuals.

Contact the author at amparkerdc@gmail.com.