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For years, liberal Democrats have agitated for the United States to tax wealth, not just income, as a way to ensure that rich Americans who derive wealth from real estate, stocks, bonds and other assets were paying more in taxes.
On Thursday, that dream survived a Supreme Court scare, but just barely.
Thanks to a narrow court ruling, a raft of plans to use the tax code to address the gaping divide between the very richest Americans and everyone else appear set to live for years to come in the campaign proposals and official budgets of top Democrats.
The idea of a wealth tax was not directly before the court on Thursday. Justices were considering the constitutionality of a new tax imposed under former President Donald J. Trump that applies to certain income earned by businesses overseas. But in taking the case, the court could have pre-emptively ruled federal wealth taxation unconstitutional.
It did not, and liberal groups celebrated the victory.
“The Supreme Court also could have taken an activist turn of the worst kind by preemptively ruling federal wealth taxes unconstitutional today,” Amy Hanauer, the executive director of the Institute on Taxation and Economic Policy, which supports higher taxes on corporations and the wealthy, said in a statement. “To its credit, the court did not do so.”
But the case also offered a window into the legal fight to come over various iterations of a wealth tax, should Congress ever adopt one. It showed a solid four justices firmly opposed to such a tax — and two more that appeared skeptical.
“This is a narrow decision,” Joe Bishop-Henchman, the vice president of the National Taxpayers Union, which opposes wealth tax proposals, said in a statement on Thursday. But, he added, “the court makes clear it is not opening the door to a wealth tax.”
The ruling in the case on Thursday was nominally about the constitutionality of a tax included in the tax overhaul Mr. Trump signed into law in 2017. The justices upheld the measure by a 7-to-2 vote.
The bigger debate around the decision, which played out across 83 pages of writings from several justices, was whether Congress has the power to impose taxes on wealth.
President Biden and other leading Democrats have pledged to pay for sweeping new spending programs, like expanded health coverage or universal paid leave, in part by taxing the net worth of some of the wealthiest people in America. They would go beyond traditional government efforts to tax income from work or investments, and instead make multimillionaires pay taxes on the gains their portfolios accrue on paper.
Many conservatives have argued those plans violate the Constitution’s limits on what sort of taxes the federal government can impose. Some groups had urged the court to side with that argument, pre-emptively declaring wealth taxes off-limits to lawmakers.
The issue largely comes down to what counts as “income.” Is it money that shows up in someone’s bank account, like from a paycheck or a stock sale? Or so-called unrealized gains from assets growing more valuable over time, even if they are not sold?
Four conservative justices suggested on Thursday, in concurring or dissenting opinions, that unrealized gains do not count as income — and that by extension, wealth taxes are a no-go. That is nearly a majority, and it was enough to alarm supporters of a wealth tax.
“It is now evident that four Supreme Court justices are enthralled by the influence of billionaires,” Morris Pearl, the leader of a group called Patriotic Millionaires that supports higher taxes on the rich, wrote in a release.
But the ruling also showed a path for a wealth tax, albeit narrow. Justice Ketanji Brown Jackson, one of the court’s liberals, wrote what is basically a blueprint for government lawyers to defend a potential wealth tax before the court and a legal theory that justices could follow to uphold it.
She raised doubts over whether the Constitution requires income to be realized in order to pass muster for federal taxation and said the court should play a “limited” role in tax debates.
She urged justices to allow the dispute to be resolved by the public, perhaps knowing that wealth taxes tend to poll well.
Two other liberal justices are likely to side with Justice Jackson if such a case ever reaches the court. That leaves a pair of conservatives as the likely swing votes: Chief Justice John G. Roberts and Justice Brett M. Kavanaugh, who wrote the court’s majority opinion on Thursday. That opinion was peppered with references to what might or might not count as “realized” income for tax purposes, but it explicitly refused to take a stance on future wealth tax questions.
“Those are potential issues for another day,” Justice Kavanaugh wrote, “and we do not address or resolve any of those issues here.”
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