WEBVTT 1 00:00:02.439 --> 00:00:06.480 Welcome to Scot dis Cast, a project of the Federalist Society for Law and 2 00:00:06.559 --> 00:00:11.320 Public Policy Studies. Our contributors joined us from around the country to bring you 3 00:00:11.400 --> 00:00:16.280 expert commentary on US Supreme Court cases as they are argued and the decisions are 4 00:00:16.320 --> 00:00:21.559 issued. The Federalist Society takes no position on particular legal or public policy issues. 5 00:00:21.800 --> 00:00:26.519 All expressions are those of the speaker. Hello, and welcome to scot 6 00:00:26.559 --> 00:00:30.320 Discast. I'm your host, Kyle hammernis On, behalf of the Faculty division 7 00:00:30.320 --> 00:00:34.560 of the Federalist Society. We are here today to discuss More versus the United 8 00:00:34.560 --> 00:00:38.159 States, which was argued before the Court on December fifth, twenty twenty three. 9 00:00:38.719 --> 00:00:42.799 Is my honor to introduce our guests today, Professor David Schizer. Professor 10 00:00:42.799 --> 00:00:46.880 Schizer is Dean emeritus and the Harvey R. Miller Professor of Law and Economics 11 00:00:46.880 --> 00:00:51.200 at Columbia Law School. So, Professor Schizer, this is a case about 12 00:00:51.240 --> 00:00:56.479 constitutional limits on Congress's power to tax. What was the question presented and why 13 00:00:56.520 --> 00:01:00.560 is it important? File? Thanks, it's great to do with you. 14 00:01:00.759 --> 00:01:06.239 I have to say there aren't often cases about the Constitution and tax, so 15 00:01:06.359 --> 00:01:08.959 for a tax guy like me, this is especially fun. And this is 16 00:01:08.959 --> 00:01:14.680 a case about a really fundamental part of the tax system, so called realization 17 00:01:14.959 --> 00:01:19.120 rule. And what that means is that if I have property and it's appreciated, 18 00:01:19.280 --> 00:01:22.599 it's worth more than I paid for it, I don't usually pay tax 19 00:01:23.159 --> 00:01:26.239 until I sell it. And that rule is called the realization rule. And 20 00:01:26.280 --> 00:01:33.200 the question is whether Congress does that when it does it because they make a 21 00:01:33.239 --> 00:01:37.599 policy judgment to do it, or does the constitution require it? In other 22 00:01:37.640 --> 00:01:42.239 words, when the sixteenth Amendment said Congress could tax income, was the sixteenth 23 00:01:42.280 --> 00:01:49.799 Amendment saying income means realized income income from a sale, but not just appreciation 24 00:01:49.280 --> 00:01:55.359 before a sale. And in nineteen twenty, so over one hundred years ago, 25 00:01:55.719 --> 00:02:00.439 the Supreme Court and case called eisnerby Macomber, suggested that that was true. 26 00:02:00.760 --> 00:02:02.920 And then the Supreme Court over the years has pivoted away from that. 27 00:02:04.799 --> 00:02:10.680 But in More versus the United States, the Court is considering whether maybe to 28 00:02:13.599 --> 00:02:17.960 reaffirm that idea. And it's really important because a great deal of the US 29 00:02:19.080 --> 00:02:23.400 tax system is based on the idea that realization is not constitutionally required, and 30 00:02:23.439 --> 00:02:29.280 there are a lot of provisions that would potentially have to be reconsidered or abandoned 31 00:02:30.000 --> 00:02:34.599 if the court rules for the taxpayer, depending upon how broad that ruling would 32 00:02:34.639 --> 00:02:37.680 be. So, Professor, you really set this case up well for us. 33 00:02:37.960 --> 00:02:42.120 Why do you think this issues come up now? So it's interesting. 34 00:02:42.599 --> 00:02:46.000 Back in August of twenty twenty two, President Biden, as part of the 35 00:02:46.039 --> 00:02:53.120 budget negotiations, proposed a tax on people with more than one hundred million dollars 36 00:02:53.199 --> 00:02:58.400 of wealth. And the basic idea was that if they had appreciated stock, 37 00:02:58.840 --> 00:03:04.439 they pay tax on the appreciation even without a sale. So Congress was considering 38 00:03:04.520 --> 00:03:09.319 this idea of taxing so called unrealized gains for people who are very wealthy. 39 00:03:09.879 --> 00:03:15.800 And then another somewhat related issue is that both Elizabeth Warren and Bernie Sanders, 40 00:03:15.800 --> 00:03:20.319 when they were running for president, talked about something else. They talked about 41 00:03:20.319 --> 00:03:24.639 a wealth tax. That's not taxing appreciation, that's just every year taxing the 42 00:03:24.719 --> 00:03:29.639 value of what we have, kind of like a property tax does for our 43 00:03:29.680 --> 00:03:31.800 house, but with all our assets. And it would be the federal government. 44 00:03:32.599 --> 00:03:38.400 And so I think this question of the limits on federal taxing power is 45 00:03:38.520 --> 00:03:44.240 very salient, in part because some people have proposed things that are different from 46 00:03:44.240 --> 00:03:47.000 what we've seen before, and just to confirm that, just as Alito and 47 00:03:47.039 --> 00:03:53.879 the argument asked the government, so what if I'm someone who started a business 48 00:03:53.879 --> 00:03:58.080 in my garage while I was in college and it's thirty years later and I'm 49 00:03:58.080 --> 00:04:02.000 a billionaire in Congress tax my appreciation. I think that was a pretty clear 50 00:04:02.039 --> 00:04:06.960 reference to the Biden mark to market tax. And then later Justice Kavanaugh said 51 00:04:08.000 --> 00:04:11.199 to the government, so let me ask you, what if the government tried 52 00:04:11.199 --> 00:04:15.960 to impose a wealth tax? Would that be unconstitutional? And so they were 53 00:04:15.000 --> 00:04:20.560 talking about this idea of taxing personal property. I think given the salience in 54 00:04:20.600 --> 00:04:26.279 public policy circles of these possibilities, the Court got interested in the issue, 55 00:04:26.279 --> 00:04:30.800 and certainly the taxpayers wanted the court to look at it. So do you 56 00:04:30.839 --> 00:04:35.120 think this was a good vehicle to decide this issue? So it turns out 57 00:04:35.360 --> 00:04:41.160 that I think it was not such a good vehicle to look at this issue. 58 00:04:41.600 --> 00:04:45.040 And it would have been possible for someone to bring a case, and 59 00:04:45.079 --> 00:04:47.920 it may still be possible for someone to bring a case that presents it really 60 00:04:47.959 --> 00:04:53.879 cleanly. And one example that occurs to me is if someone wants to bet 61 00:04:54.000 --> 00:04:59.720 on oil prices so they get an oil future from an exchange that is something 62 00:04:59.800 --> 00:05:04.319 with a tax lawyer's technical name so called twelve to fifty six contract, which 63 00:05:04.319 --> 00:05:10.920 means Congress taxes that every year, regardless of whether you sell. Tax lawyers 64 00:05:10.920 --> 00:05:15.399 call that a mark to market rule, and this is the quintessential example of 65 00:05:15.560 --> 00:05:21.480 taxing appreciation without a sale. So someone who's done one of those contracts, 66 00:05:21.519 --> 00:05:26.079 who then pays tax at the end of the year could go to court and 67 00:05:26.120 --> 00:05:29.399 say, give me my money back. I shouldn't be taxed. It's not 68 00:05:29.519 --> 00:05:33.160 okay, and then the court would squarely face the question of whether Congress has 69 00:05:33.160 --> 00:05:40.560 the power to tax unrealized gains. But this case doesn't quite present it. 70 00:05:41.600 --> 00:05:44.160 And you can look at it in one way, and it does, but 71 00:05:44.240 --> 00:05:46.879 I think, really it doesn't. And what's interesting is the court in the 72 00:05:46.959 --> 00:05:50.040 argument seems to think it doesn't. So let me explain a bit about this 73 00:05:50.120 --> 00:05:55.439 case, which I have to say is just a little bit complicated. But 74 00:05:55.480 --> 00:06:00.680 the key point here is that the taxpayers owned shares in a foreign company company 75 00:06:00.759 --> 00:06:08.240 organized in India. It had profits, the property has appreciated, the stock 76 00:06:08.319 --> 00:06:13.680 is appreciated. They've held it for many years, and because of an international 77 00:06:13.680 --> 00:06:16.000 tax reform that I'll explain in a minute. Congress said, you know what, 78 00:06:16.040 --> 00:06:21.680 we're taxing shareholders on the earnings of the company. But that's the thing 79 00:06:23.240 --> 00:06:26.600 is, it's not a tax on the appreciation in the stock per se. 80 00:06:27.199 --> 00:06:30.040 It's a tax on the earnings of the company. So if you ask yourself 81 00:06:30.079 --> 00:06:35.360 the question, did somebody realize gains here? The answer is yes, the 82 00:06:35.360 --> 00:06:41.839 corporation did. The corporation has a realization. And the real question here is 83 00:06:42.279 --> 00:06:47.920 can the realization of the company be attributed to the owner? So it's not 84 00:06:48.199 --> 00:06:54.600 necessarily that we're taxing the owner on its appreciation so much as we're taxing the 85 00:06:54.639 --> 00:07:00.920 owner on realized gains of the entity that it owns. Actually is a different 86 00:07:01.079 --> 00:07:06.720 issue, which is why this case may end up not really giving an answer 87 00:07:06.759 --> 00:07:11.920 to the question of whether unrealized gains can be taxed. And just two more 88 00:07:11.959 --> 00:07:16.040 sentences on why this came up. So, for many years, the US 89 00:07:16.399 --> 00:07:21.879 had the ambition to tax foreign companies on their earnings, but only when those 90 00:07:23.040 --> 00:07:29.920 earnings are distributed to US shareholders. So no tax on the US shareholder until 91 00:07:29.959 --> 00:07:33.399 she receives the dividend or unless she sells her stock, but she can't tax 92 00:07:33.879 --> 00:07:41.120 the foreign company itself, and in twenty seventeen, Congress decided that it was 93 00:07:41.160 --> 00:07:46.160 not a good idea to tax these dividends because it was encouraging companies to keep 94 00:07:46.240 --> 00:07:49.639 cash overseas. The price of bringing money back to the US was that they 95 00:07:49.639 --> 00:07:53.879 had to pay tax on it. So literally about two and a half trillion 96 00:07:53.879 --> 00:07:58.800 dollars attacks of earnings that were not coming back. And so Cargres said, 97 00:07:58.800 --> 00:08:01.959 we're not going to do that anymore. We're going to tax the earnings when 98 00:08:01.959 --> 00:08:07.079 these companies earn them at a reduced rate. But since we haven't been doing 99 00:08:07.079 --> 00:08:11.720 that before, we'll have a one time transition tax on the earnings that haven't 100 00:08:11.720 --> 00:08:16.800 been taxed and haven't been brought back. And so that tax, which the 101 00:08:16.839 --> 00:08:22.600 briefs referred to as the MRT or the mandatory repatriation tax, that's the tax 102 00:08:22.600 --> 00:08:26.160 that was imposed on the taxpayers here, and it's about the earnings of the 103 00:08:26.160 --> 00:08:31.840 company, which we're realized so long and the short of it is not a 104 00:08:31.879 --> 00:08:39.440 clean vehicle to look at this issue. So we saw in the arguments many 105 00:08:39.200 --> 00:08:45.480 competing visions of this case. So does the court have more than one way 106 00:08:45.519 --> 00:08:48.200 to decide this case? During the argument, as I said there were clues 107 00:08:48.240 --> 00:08:52.720 about which way the court would go. Do you see anything like that here? 108 00:08:54.320 --> 00:08:58.120 Yeah, So there are really two ways the court can go in deciding 109 00:08:58.159 --> 00:09:03.840 this case. One is the question presented, which is, does the sixteenth 110 00:09:03.879 --> 00:09:11.360 Amendment allow Congress to tax unrealized gains gains from property that hasn't been told yet. 111 00:09:11.519 --> 00:09:13.960 That's what I would call the broader issue, and they could resolve it, 112 00:09:15.519 --> 00:09:18.799 and they might, but it's more likely that they're going to go with 113 00:09:18.879 --> 00:09:24.000 a narrower issue, which is, we don't decide whether the Constitution requires a 114 00:09:24.039 --> 00:09:30.960 realization. The issue is not presented here because there were realizations at the corporate 115 00:09:31.039 --> 00:09:35.879 level. The company that they own had realizations, and our question here is 116 00:09:35.960 --> 00:09:39.879 not whether a realization is required, because we have one, but whether the 117 00:09:39.919 --> 00:09:46.759 realization can be attributed to the owner whose realization was it. I think is 118 00:09:46.759 --> 00:09:50.360 a different way to decide the case. In the interest of full disclosure, 119 00:09:50.559 --> 00:09:56.320 I joined some people writing an anvocates brief suggesting that theory for the American Tax 120 00:09:56.360 --> 00:10:01.960 Policy Institute. But what's interesting is that that was the theory that basically dominated 121 00:10:01.960 --> 00:10:05.200 the discussions in the argument, and it just started off the very first question. 122 00:10:05.559 --> 00:10:11.480 Justice Thomas says, tell us, tell us about the difference between realization 123 00:10:11.960 --> 00:10:16.919 and attribution, and it just went on from their. Justice Kavanaugh at one 124 00:10:16.960 --> 00:10:20.600 point sort of followed up. The Chief Justice was saying, so are there 125 00:10:20.679 --> 00:10:26.159 limits? Are there constitutional limits on taxing without realization? And Justice Kavanaugh jumps 126 00:10:26.159 --> 00:10:28.279 in and said, well, you know, we really don't have to decide 127 00:10:28.279 --> 00:10:31.759 that. Now, we can decide it more narrowly by just asking whether it's 128 00:10:31.799 --> 00:10:39.559 okay to attribute to attribute this to the owners. So long way of saying, 129 00:10:39.679 --> 00:10:45.679 it does seem like the court could decide this narrowly, and based on 130 00:10:46.039 --> 00:10:50.360 the argument, I predict that they probably will, but only time will tell. 131 00:10:50.600 --> 00:10:56.080 So you said, the court can decide the case narrowly or broadly. 132 00:10:56.840 --> 00:11:01.279 If they decide narrowly, what are the competing arguments? Yeah, so, 133 00:11:01.320 --> 00:11:05.679 look, there are different ways to look at this. But what is the 134 00:11:05.679 --> 00:11:13.600 government saying. The government is saying it's fine for Congress to tax the owners 135 00:11:13.799 --> 00:11:16.960 of a business instead of the business itself. That's all that they're doing here, 136 00:11:18.320 --> 00:11:22.600 and they've done it since the beginning of the income tax with partnerships. 137 00:11:24.080 --> 00:11:28.559 So I think the best argument that the government has here is this is just 138 00:11:28.679 --> 00:11:33.679 like a partnership, and the Supreme Court said decades ago that that was okay. 139 00:11:33.519 --> 00:11:37.240 So in the US when apart, when we operate a business through a 140 00:11:37.240 --> 00:11:43.039 partnership, partnership earns money, but it doesn't pay tax on the money. 141 00:11:43.200 --> 00:11:46.080 It's the owners that are taxed on the money the partnership earns. And this 142 00:11:46.200 --> 00:11:54.159 is the same thing. Basically, treat this foreign corporation like a partnership. 143 00:11:54.240 --> 00:11:58.840 Now the taxpayer is saying, but it isn't a partnership, it's a corporation. 144 00:11:58.360 --> 00:12:03.799 And that brings us back to this case Eisnervy Macomber from nineteen twenty, 145 00:12:03.120 --> 00:12:07.279 where part of the reasoning in the case was to say that was a domestic 146 00:12:07.320 --> 00:12:11.840 corporation, but to say, yes, partnerships can be taxed that way, 147 00:12:11.879 --> 00:12:16.960 but we don't do it for corporations. Corporations are a real solid legal entity. 148 00:12:18.039 --> 00:12:22.120 Partnerships aren't, and so therefore you shouldn't do that, and we should 149 00:12:22.200 --> 00:12:26.960 just tax a taxpayer on their own realizations. Just tax the owner and what 150 00:12:26.000 --> 00:12:30.679 the owner does, not what the corporation does. Now, the truth is 151 00:12:30.799 --> 00:12:35.000 that language in EISNERVW Macomber. It's very clear on the point, but it 152 00:12:35.039 --> 00:12:39.919 also is dicta. It didn't really it wasn't really necessary for the holding, 153 00:12:39.360 --> 00:12:45.519 and so in a whole bunch of other cases, the later courts have narrowed 154 00:12:45.559 --> 00:12:50.759 the way eisnerv Macomber is read. The taxpayer's best hope here is to revive 155 00:12:50.799 --> 00:12:54.320 eisnerby Macomber, not just the holding, but that language, and to say 156 00:12:54.360 --> 00:12:58.360 yes, with a corporation it's different. We can't do that. But on 157 00:12:58.399 --> 00:13:03.559 the other hand, they want to go with the partnership analogy, then the 158 00:13:03.600 --> 00:13:09.639 government wins here. Okay, So that's if they decided narrowly. If the 159 00:13:09.679 --> 00:13:13.519 court does decide to rule on the broader question, that is, does the 160 00:13:13.559 --> 00:13:20.639 sixteenth Amendment require a realization? What are the compedian arguments there? So there 161 00:13:20.080 --> 00:13:26.720 we're looking at that broader issue. Does the word income in the sixteenth Amendment 162 00:13:26.960 --> 00:13:33.360 mean realized income? And so there are some interesting arguments on both sides there. 163 00:13:33.679 --> 00:13:41.399 So the taxpayer emphasizes that the phrasing is income from whatever source derived, 164 00:13:41.639 --> 00:13:45.879 and they focus on that word derived, suggesting that it isn't enough to be 165 00:13:46.000 --> 00:13:50.080 income, it has to also be derived. And they say that the word 166 00:13:50.200 --> 00:13:54.799 derived it applies a realization. And so that is one way to read from 167 00:13:54.799 --> 00:14:00.440 whatever source derived, but the government has its own reading of that language, 168 00:14:00.440 --> 00:14:05.960 which is different. They remind the court that US had an income tax, 169 00:14:07.480 --> 00:14:13.320 and then in eighteen ninety five the Supreme Court said an income tax is not 170 00:14:13.480 --> 00:14:18.039 constitutional, and they said, at least a certain income tax, an income 171 00:14:18.120 --> 00:14:24.159 tax where the income is from property is not constitutional. Meanwhile, there was 172 00:14:24.159 --> 00:14:31.120 still an argument that an income tax from labor was constitutional. And President Taft 173 00:14:31.879 --> 00:14:37.639 was president at the time, or rather a few years later, not at 174 00:14:37.639 --> 00:14:41.759 the time. A few years later, there was a strong political ground swell 175 00:14:41.799 --> 00:14:45.919 to enact an income tax. Some people said, you know what, let's 176 00:14:46.120 --> 00:14:48.840 just send it back to the court. They'll overrule themselves. It was five 177 00:14:48.879 --> 00:14:54.159 to four last time they overruled a different case earlier. Maybe they'll swing back. 178 00:14:54.559 --> 00:14:56.360 And Taft said, you know, I don't want to put the Court 179 00:14:56.360 --> 00:15:01.159 in a position where it has to flip flop that way to lose credibility. 180 00:15:01.360 --> 00:15:03.480 Let's just propose, you know, let's propose an amendment. And so they 181 00:15:03.480 --> 00:15:09.480 did. They proposed the sixteenth Amendment. One of the interesting codas about that 182 00:15:09.559 --> 00:15:13.480 is, of course Taff became a Chief Justice not that long after, so 183 00:15:13.600 --> 00:15:20.000 his affection for the court was personal as well as institutional. In any event, 184 00:15:20.440 --> 00:15:24.679 The argument the government makes is income from whatever source derived. The phrase 185 00:15:24.759 --> 00:15:28.639 from whatever source derived refers to pollock. You know, they're saying, look, 186 00:15:28.720 --> 00:15:33.559 you said income from property. Not okay. We're saying it is okay, 187 00:15:33.600 --> 00:15:37.879 from whatever source derived, it's fine. So there's this textual issue. 188 00:15:37.279 --> 00:15:41.720 The government has another textual argument, which is, hey, the word realization. 189 00:15:43.879 --> 00:15:48.519 It doesn't appear in the amendment, and Congress could easily have said realized 190 00:15:48.559 --> 00:15:52.519 income from whatever source derived. They didn't say that, and so as a 191 00:15:52.519 --> 00:15:56.720 textual matter, don't add a word that isn't there is. The government's point, 192 00:15:56.480 --> 00:16:00.200 also really interesting, is to look at contemporary practice to try to figure 193 00:16:00.200 --> 00:16:06.399 out what the words meant the taxpayer. That focuses a lot on dictionaries, 194 00:16:06.559 --> 00:16:12.039 some of which sort of imply that income involves some sort of severable gain. 195 00:16:12.679 --> 00:16:18.240 But then there are other dictionary definitions that don't say that. There's some history 196 00:16:18.320 --> 00:16:22.840 about a corporate income tax at the time where the Treasury was reading it not 197 00:16:23.000 --> 00:16:29.240 to require a realization. One of the points that nobody seems to be making, 198 00:16:29.279 --> 00:16:32.440 but I think is interesting, is there's a practice in the tax law 199 00:16:32.480 --> 00:16:38.080 called depreciation, which basically allows you to take a deduction without selling so for 200 00:16:38.759 --> 00:16:45.960 equipment that wears out, and so the depreciation rule is not consistent with realization. 201 00:16:48.080 --> 00:16:52.360 The court was considering whether depreciation was okay, not under an income tax, 202 00:16:52.360 --> 00:16:56.720 because we didn't have one then, but under some of these railroad regulation 203 00:16:56.879 --> 00:17:02.080 cases, and the court initially said Nope, can't do it, and then 204 00:17:02.120 --> 00:17:04.359 they later said, actually, no, you can. And that happened only 205 00:17:04.400 --> 00:17:11.279 a few years before the sixteenth Amendment. And it may be that we can 206 00:17:11.440 --> 00:17:15.519 shed some light on what income meant and meant to the court at the time 207 00:17:15.559 --> 00:17:18.519 and what meant to lawyers at the time because of those cases. But I 208 00:17:18.559 --> 00:17:26.279 would sum up what's interesting and challenging about the originalist analysis in the following way. 209 00:17:26.960 --> 00:17:33.559 We'd love to know what the public meaning was, and I suspect that 210 00:17:33.640 --> 00:17:38.079 the public meaning varies depending on whether you were to ask experts or the average 211 00:17:38.160 --> 00:17:44.039 voter. And I think if you asked an expert, an accountant because income 212 00:17:44.160 --> 00:17:48.079 was a word with a lot of significance in accounting at the time, or 213 00:17:48.119 --> 00:17:53.279 a lawyer, my gut my read based on the sources, is that there's 214 00:17:53.279 --> 00:17:57.799 a very strong argument that realization is not required On the other hand, if 215 00:17:57.799 --> 00:18:03.160 we're trying to figure out what the word income meant to the average voter in 216 00:18:03.279 --> 00:18:07.559 nineteen thirteen when the amendment was ratified, it was probably a pretty good argument 217 00:18:07.559 --> 00:18:11.240 that they had no idea that unrealized gains were included there. And I say 218 00:18:11.240 --> 00:18:17.480 that partly because most voters today don't generally think that that should count as an 219 00:18:17.519 --> 00:18:22.400 income. So if the court reaches this issue, it has some very interesting 220 00:18:22.519 --> 00:18:27.240 original sources and texts to analyze, and of course the number of the court's 221 00:18:27.240 --> 00:18:34.160 own precedents as well. So over the course of this case, and including 222 00:18:34.240 --> 00:18:40.440 in the briefs and during oral arguments, did we learn anything about the constitutionality 223 00:18:40.519 --> 00:18:45.039 of a wealth tax like the kind proposed by Senators Bernie Sanders and Elizabeth Warren. 224 00:18:45.960 --> 00:18:51.519 So there was one really interesting moment in the argument, and that was 225 00:18:51.759 --> 00:18:59.640 when Justice Kavanaugh said to the government's lawyer, so tell me, what would 226 00:18:59.680 --> 00:19:04.359 happen. Do you agree that a tax on wealth just a value of personal 227 00:19:04.400 --> 00:19:11.039 property? Do you agree that that would be a direct tax subject to apportionment? 228 00:19:11.440 --> 00:19:15.640 The government itself said yes, absolutely, that would be a wealth tax, 229 00:19:15.559 --> 00:19:19.839 which is a concession in this case. Doesn't mean that the Court that 230 00:19:19.839 --> 00:19:23.799 the government would be bound to take that position later. But it is interesting 231 00:19:23.839 --> 00:19:26.720 that even the government is saying that would be a wealth tax. For what 232 00:19:26.799 --> 00:19:30.079 it's worth. I certainly think it's a wealth tax, but there's a debate 233 00:19:30.119 --> 00:19:36.160 about that, which brings us to Justice Jackson. At another point in the 234 00:19:36.319 --> 00:19:41.720 argument, she mentioned a backup claim where she was sort of gesturing in the 235 00:19:41.720 --> 00:19:51.240 direction of saying that the wealth taxes are kind of could possibly be okay. 236 00:19:51.279 --> 00:19:56.319 And so let me say a word about the relevant background. The sixteenth Amendment 237 00:19:56.480 --> 00:20:03.119 was enacted because without it, the Cordon Pollock said that an income tax is 238 00:20:03.119 --> 00:20:08.279 what's called a direct tax under the Constitution that hasn't been apportioned. So what 239 00:20:08.440 --> 00:20:12.640 is that all about. In let's go back to the Articles of Confederation. 240 00:20:14.920 --> 00:20:22.039 The United States, brand new country founded within it founded because of a tax 241 00:20:22.039 --> 00:20:26.240 revolt. The king was imposing taxes that were unpopular and perceived as illegitimate. 242 00:20:26.599 --> 00:20:30.000 So what do you do when you're a new national government. You tried very 243 00:20:30.039 --> 00:20:34.279 hard not to look like King George, and they went a little too far 244 00:20:34.799 --> 00:20:40.000 because the national government had no tax in power. What they did is they 245 00:20:40.079 --> 00:20:45.759 requested contributions, but those contributions were voluntary, and only about thirty seven percent 246 00:20:45.960 --> 00:20:51.759 of the taxes they wanted actually were collected. But what is quite interesting is 247 00:20:51.759 --> 00:20:56.160 how are they collecting these taxes not from individuals. They were billing the states. 248 00:20:56.880 --> 00:21:03.519 So basically, think about the euarion. These are entities, sovereign entities, 249 00:21:03.640 --> 00:21:08.000 joining together for a limited common purpose, and it would be the governments 250 00:21:08.160 --> 00:21:11.880 of these entities that would contribute, not to people, because this was sort 251 00:21:11.880 --> 00:21:15.000 of a union of governments, and that's the way the Articles of Confederation. 252 00:21:17.000 --> 00:21:22.160 So it was conceived and it was a terrible failure. The biggest problem with 253 00:21:22.200 --> 00:21:26.759 the articles is they were broke. They couldn't afford a military. They couldn't 254 00:21:26.079 --> 00:21:33.680 you know, they had no money. And so Hamilton Addison, George Washington 255 00:21:33.799 --> 00:21:37.000 or there were people who said, we have to do something, we have 256 00:21:37.079 --> 00:21:40.319 to change this. But the anti federalists said, you know, we really 257 00:21:40.400 --> 00:21:45.039 like the Articles of Confederation. Let's keep it limited, let's keep it the 258 00:21:45.079 --> 00:21:48.960 way it is. But with one change, we will have a five percent 259 00:21:48.160 --> 00:21:53.279 tax on imports for the national government and that's it, and otherwise the Articles 260 00:21:53.279 --> 00:21:56.640 of Confederation will remain the way it is. Well, they could have gone 261 00:21:56.640 --> 00:22:00.480 that way but they didn't go that way, and one of the since they 262 00:22:00.480 --> 00:22:07.119 didn't was a concern about emergencies. So when do we need war? I'm 263 00:22:07.119 --> 00:22:10.440 sorry, when do we need taxes? The most time of war? For 264 00:22:10.519 --> 00:22:14.839 the young United States? What would trade look like during a war? Well, 265 00:22:14.920 --> 00:22:18.240 trade would stop. We had no navy, which means if our only 266 00:22:18.319 --> 00:22:23.599 source of revenue was taxes on imports, that wasn't going to happen. And 267 00:22:23.640 --> 00:22:30.799 so Hamilton and Madison and others they said, we like taxes on imports and 268 00:22:30.839 --> 00:22:34.319 what are called X sizes, which are consumption taxes, taxes on transactions. 269 00:22:34.559 --> 00:22:38.039 We love those. Those are great. The people can decide not to do 270 00:22:38.079 --> 00:22:42.640 the transaction, so it's sort of a voluntary tax almost, and the government 271 00:22:42.680 --> 00:22:45.960 can't overtax. So we think those are great, but they're not enough. 272 00:22:47.319 --> 00:22:52.559 We need to have these other taxes, direct taxes, which are which are 273 00:22:52.559 --> 00:22:57.359 more like property taxes, taxes on real estate. But the only way those 274 00:22:57.400 --> 00:23:02.640 are going to be allowed is if we do something called apportionment. An apportionment 275 00:23:02.799 --> 00:23:10.000 means the amount of attax from each state has to correspond with its population. 276 00:23:10.839 --> 00:23:18.720 So if Connecticut and Mississippi each represent two percent of the United states's population. 277 00:23:18.440 --> 00:23:23.000 That means that with a direct tax that's apportioned, two percent of the revenue 278 00:23:23.039 --> 00:23:26.519 has to come from Connecticut and two percent of the revenue has to come from 279 00:23:26.519 --> 00:23:32.119 Mississippi. But there's a problem. Connecticut is the wealthiest state in the Union. 280 00:23:32.640 --> 00:23:34.960 Mississippi, I think is the second least wealthy state in the Union, 281 00:23:36.359 --> 00:23:38.920 and in order to collect the same revenue, ironically, you're going to need 282 00:23:38.920 --> 00:23:45.240 a much higher tax rate in Mississippi. So a higher tax in the less 283 00:23:45.400 --> 00:23:51.480 wealthy state not politically appealing, but it made sense to the framers because what 284 00:23:51.799 --> 00:23:56.559 worried them is they didn't want some number of states ganging up on another state 285 00:23:56.599 --> 00:24:02.400 and imposing this proportionate tax. So a direct tax has to be apportioned. 286 00:24:02.759 --> 00:24:08.039 Politically unpopular, but it's necessary under the constitution. And only the sixteenth Amendment 287 00:24:08.599 --> 00:24:15.000 allows for income taxes. At least that you could argue that an income tax 288 00:24:15.079 --> 00:24:18.920 wasn't direct beyond the scope of our discussion today, But in any event, 289 00:24:19.200 --> 00:24:23.599 that's why the sixteenth Amendment was enacted. But it didn't overturn this idea of 290 00:24:23.599 --> 00:24:27.799 direct taxes that have to be apportioned. It just carved out income taxes from 291 00:24:27.799 --> 00:24:33.279 that framework. So Justice Jackson raises the question, Hey, even if the 292 00:24:33.319 --> 00:24:41.000 sixteenth Amendment doesn't apply, is it possible that the provision here, the income 293 00:24:41.039 --> 00:24:45.720 tax provision here, could be justified as an excise tax? And so I 294 00:24:45.759 --> 00:24:51.000 doubt the court will reach the question. But there were glimmers of this issue 295 00:24:51.160 --> 00:24:55.640 about direct taxes and wealth taxes. Again, I think the most significant one 296 00:24:56.200 --> 00:25:00.480 is the government, at least this week saying that they I think a wealth 297 00:25:00.480 --> 00:25:03.519 tax would be direct and it would have to be a portioned but we don't 298 00:25:03.519 --> 00:25:08.640 have one. And if Congress ever enacts it, I suppose the Court will 299 00:25:08.640 --> 00:25:14.799 certainly have to appine on that. Okay, that's great. Typically, we 300 00:25:14.839 --> 00:25:19.240 asked one last question, if you could read the tea leaves, how do 301 00:25:19.319 --> 00:25:23.079 you think that this case will turn out? You already said that you believe 302 00:25:23.119 --> 00:25:27.599 that they'll decide it narrowly. Do you see which way it could go? 303 00:25:29.720 --> 00:25:33.440 So I think that the government is going to win here. It looks like 304 00:25:33.759 --> 00:25:37.759 there are a number of votes for the idea that we don't have to reach 305 00:25:37.839 --> 00:25:44.200 the question of whether realization is constitutionally required. We think there was a realization 306 00:25:44.359 --> 00:25:48.599 here at the corporate level, and it can be attributed to the owners in 307 00:25:48.640 --> 00:25:51.799 the same way we allow it with partnerships. I think that's what they'll do. 308 00:25:52.759 --> 00:25:56.519 It would not surprise me if a pretty significant majority signs on. Maybe 309 00:25:56.559 --> 00:26:00.039 even it'll be unanimous. It could be wildly wrong, but we'll see. 310 00:26:00.359 --> 00:26:07.200 And I think the interesting question is whether there will be concurrences, with Justice 311 00:26:07.279 --> 00:26:11.559 Jackson perhaps saying even if not, I think this could be an excise tax. 312 00:26:12.000 --> 00:26:18.079 With Justice's Gorsa and Alito, and perhaps Thomas and Roberts also, they 313 00:26:18.160 --> 00:26:23.240 sort of were interested in this, but perhaps them saying this doesn't mean that 314 00:26:23.400 --> 00:26:29.759 unrealized appreciation can be taxed, and we await a case that allows us to 315 00:26:29.799 --> 00:26:33.599 consider that. But we think that there are real issues there and so on, 316 00:26:33.720 --> 00:26:37.640 so we may learn something in concurrences. But at least based on the 317 00:26:37.720 --> 00:26:42.400 argument, it seemed quite plausible that the ruling itself will be pretty narrow. 318 00:26:44.440 --> 00:26:47.759 All well, thank you so much for joining us today, Professor Schizler. 319 00:26:48.359 --> 00:26:52.359 This was great, and I just wanted to say thank you from the Federalist 320 00:26:52.400 --> 00:26:56.440 Society. Thank you, Kyle, my pleasure. Thank you for listening to 321 00:26:56.440 --> 00:27:00.799 this episode of scot Discust. Discast is a project of the Federalist Society, 322 00:27:00.960 --> 00:27:07.680 a not for profit educational organization of conservative and libertarian law students, law professors, 323 00:27:07.680 --> 00:27:11.799 and lawyers, founded upon the principles that the state exists to preserve freedom, 324 00:27:11.119 --> 00:27:15.880 that the separation of governmental powers is central to our constitution, and that 325 00:27:15.000 --> 00:27:19.039 it is emphatically the province and duty of the judiciary to say what the law 326 00:27:19.200 --> 00:27:22.799 is, not what it should mean. 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