By Luc Cohen
(Reuters) -The proposal by U.S. Senate Democrats to tax billionaires https://www.reuters.com/world/us/us-senate-democrat-unveils-billionaires-tax-biden-agenda-2021-10-27' tradeable assets to help finance President Joe Biden's social spending agenda will almost certainly face lawsuits, tax experts said.
White House Press Secretary Jen Psaki said on Wednesday that Biden supports the so-called "billionaires' tax" and believes it is legal.
The following explains how the proposal might be challenged and how supporters could defend it.
WHAT WOULD BE THE GROUNDS FOR LEGAL CHALLENGES?
A central issue is whether the U.S. Constitution gives Congress the authority to tax wealth. The tax would impose a 23.8% tax rate for long-term capital gains on tradable assets, whether or not they have been sold. Opponents are likely to argue that unrealized gains are not income and cannot legally be taxed.
The Constitution requires that federal "direct taxes" - which are taxes levied on people paying them, rather than on goods and services - must be "apportioned" among the states.
That means each state must pay an equal amount on a per-capita basis, similar to how seats are allocated in the House of Representatives. This would be impractical in the case of a billionaires' tax since the ultra-wealthy are highly concentrated in states like New York and California.
The 16th Amendment to the Constitution, ratified in 1913, created an exception allowing the imposition of federal income taxes without apportionment. There is no similar exemption for wealth. Opponents of the billionaire tax are likely to cite this as support for the claim that the government cannot implement a wealth tax that is not apportioned equally among the states.
"Taxing unrealized capital gains is not taxing income," said David Rivkin, a partner at law firm Baker & Hostetler in Washington.
He cited a 1955 case in which the Supreme Court defined income as "wealth, clearly realized, and over which the taxpayers have complete dominion."
WHO MIGHT CHALLENGE THE LAW?
Any billionaire subject to the law would have grounds to sue Janet Yellen in her official capacity as Treasury Secretary to challenge the tax's constitutionality, Rivkin said.
It could take about a year for legal challenges to wend their way through the appeals process, experts say.
A potential plaintiff may need to wait until the tax is actually due in order to sue, but if the bill contains an immediate record-keeping requirement, a challenge could come sooner, he added.
"The constitutionality would be challenged immediately, and challenged by people with a lot of money to pay very high-powered lawyers," said Erik Jensen, professor emeritus of law at Case Western Reserve University in Cleveland, Ohio.
Any constitutional challenge could be decided by the Supreme Court, where conservative justices hold a 6-3 majority.
HOW COULD PROPONENTS OF A WEALTH TAX DEFEND IT?
Supporters could argue that similar laws are already on the books.
Senate Finance Committee Chairman Ron Wyden, an Oregon Democrat who authored the proposal, told reporters on Wednesday that the tax is a "legal" remedy to a "flagrant loophole."
In support of the proposal, Wyden noted there is a provision of the U.S. tax code that lets some taxpayers treat unrealized capital gains as income even if they have not sold the underlying securities.
In addition, the U.S. government already taxes some accrued gains including debt transactions and passive income earned by U.S. residents from foreign corporations, according to a 2019 paper co-written by David Kamin, now a White House tax policy adviser.
WHAT CASES COULD BE CITED AS PRECEDENT?
The Supreme Court has upheld special taxes against the rich long before the 16th Amendment, which could boost proponents' argument that a billionaires' tax is constitutional..
Bruce Ackerman, a professor at Yale Law School, pointed to a 1796 ruling from the court that a tax on horse-drawn carriages, then considered a luxury, was permissible without apportionment among the states.
Having a carriage in the late 18th century, Ackerman said, "was the equivalent of [being] a billionaire."
More recently, a Washington State couple represented by Rivkin challenged the constitutionality of a provision of the 2017 tax reform law, known as the Mandatory Repatriation Tax. The provision taxes citizens' earnings from investments in overseas corporations even if they have not received dividends.
That case is on appeal to the U.S. Court of Appeals for the Ninth Circuit.
(Reporting by Luc Cohen in New YorkAdditional reporting by Trevor Hunnicutt and Richard Cowan in Washington;Editing by Noeleen Walder and Alistair Bell)