Can the government impose an income tax when you never had income? That may seem like a trick question, but it’s exactly what happened to Charles and Kathleen Moore. In 2006, the Moores invested in a start‐up Indian company called KisanKraft, whose goal was to provide low‐cost, efficient tools to rural Indian farmers. The Moores believed in KisanKraft’s mission and retained their shares of KisanKraft for over a decade, never selling it for a profit. And KisanKraft reinvested all of its own profits in the company, never paying dividends. For that reason, the Moores never saw a dollar from their investment.
Yet in 2017, the Moores suddenly received a hefty federal tax bill for their ownership stake in KisanKraft. How could that be, if they never earned any money from their holdings? The reason is a provision of the 2017 Tax Cuts and Jobs Act called the Mandatory Repatriation Tax. For U.S. taxpayers who met a certain minimum threshold of ownership in certain foreign corporations, the Mandatory Repatriation Tax imposed a tax bill as if those taxpayers had earned a 2017 dividend from the corporation for profits going back years. Because the Moores owned roughly 13 percent of KisanKraft shares, they were taxed as if KisanKraft had paid them a 2017 dividend worth 13 percent of KisanKraft’s earnings since 2006. Even though that 2017 dividend was fictional, their tax bill was very real.
Read the whole article for the legal wrangling that’s going on; with a bit of luck and judges with some actual activity in their brain pans, the Moores won’t end up having to pay this ridiculous tax bill.
This, True Believers, is an awfully good illustration of government gone nucking futz. These good folks are being ordered to pay an “income” tax where there was no income. It’s about as idiotic – that is to say, very idiotic – as President Biden(‘s handlers) idea that people should pay a “wealth tax” which, aside from being illegal and unconstitutional, would include taxing unrealized income. That is to say, potential income that the taxpayer has not received.
There’s an answer to all this, but it’s pretty unlikely to happen: Repeal the Sixteenth Amendment, do away with all production-based taxes including capital gains, and replace them with a consumption-based tax at the retail, and only the retail level. A sales tax, not a value-added tax. That would be much friendlier to business and economic growth while eliminating this kind of stupidity.
But, because it makes sense, it’s not likely to happen. Such is the nature of overbearing government.