Charles and Kathleen Moore and the Coming Tax Armageddon

Abstract

The Supreme Court decided last term, against predictions, that U.S. shareholders could be taxed on the undistributed earnings of their foreign corporation. The Court expressly did not decide the “Armageddon question,” whether a wealth tax or mark-to-market tax would be constitutional.

In the coming Armageddon, the Court needs to reverse the error in Pollock v. Farmers’ Loan & Trust Co., which said that the Constitution “prevent[s] an attack upon accumulated property by mere force of numbers.” That is exactly wrong. Apportionment of direct tax in fact was written to reach the wealth of the states using the labor of the population of a state to measure state wealth. The Founders, sitting as Justices in the early Supreme Court, held that if apportionment was not constructive, then the tax was therefore not a “direct tax” for which apportionment was required.

The Pollock Court imposed its private, ideological conclusion on words it did not understand, ignorant of the history and rationale for the words. The Supreme Court retreated from its error in Pollock over the next 25 years with the legal fiction that all taxes that came before the Court were excise taxes. The Sixteenth Amendment, allowing an income tax, was in context the last nail in the coffin.

Eisner v. Macomber resurrected Pollock from the dead with an inappropriately narrow definition of income, requiring that income be severed from capital. That defines a consumption tax, not an income tax. To consume bread from a loaf, one must slice, break or sever the bread from the loaf. But bread left in the loaf is fine savings, available for future consumption or for an emergency. “Income” includes both consumption and savings.

When the appropriate case reaches the Supreme Court, the Court needs to reverse Pollock, and Macomber with it, to allow the Democracy to tax wealth as the Constitution was written to allow.