Richard Epstein opines on a big tax case decided by the Supreme Court, tries to make sense of Louisiana’s inevitable First Amendment case, and weighs in on Manhattan DA Alvin Bragg’s “punishment” of Columbia protestors.


Tom Church: [00:00:00] This is the Libertarian Podcast from the Hoover Institution. I'm your host, Tom Church, and I'm joined, as always, by the Libertarian Professor Richard Epstein. Richard is the Peter and Kirsten Bedford Senior Fellow here at the Hoover Institution. He's the Lawrence A. Tisch Professor of Law at NYU, and he's a Senior Lecturer at the University of Chicago.

Richard, how are you? Ready for another, Supreme Court roundup?

Richard Epstein: Oh, yes. this is the boom season for us. Like April is for accountants.

Tom Church: It is indeed. Although we still don't have rulings on the Trump immunity case or the obstruction charges in the January 6th case.

Richard Epstein: The, question about the two challenges to, the Chevron case, Loper and Relentless.

I love the name of the second one, Relentless, because that's what we are with respect to that issue.

Tom Church: I was going to say Chevron is something I want to hear more about. All right. But we do have a really interesting tax case. I want to talk to you about [00:01:00] Moore versus United States decided seven, two, authored by Justice Kavanaugh.

we've talked about this previously when it was maybe about a year ago. this is concerned with taxation of foreign earnings. I guess really what it is, it's a, it was a mandatory repatriation, tax in the 2017 Tax Cuts and Jobs Act. And it's this issue of can an entity, can a corporation that, hasn't necessarily, corporations that have realized taxes, but not distributed the earnings, Can people who own shares in this be taxed?

it's this unearned taxation case. So annoyingly, the court didn't make a decision on whether the constitution requires income to be realized before it's taxed, but it did say in this case, this tax was allowed. So help me disentangle what's happening here.

Richard Epstein: Okay. Look, this is a, technical interest of momentous importance.

What happened in this case to be more technically precise about it is under the 2017 act, [00:02:00] American people, get their money repatriated to them. That is the shares go to the country without tax. And then there is the question, if you have a majority of shares owned by Americans, you get taxed on that income while it's still inside the corporation, even though you cannot reach it.

The amount of money involved is known to the penny 15, 000 and change the argument that is made on behalf of saying it should not be taxed is ignoring the constitutional dimension for a moment is why do you want to tax people on money that they don't have when they have to take Income from other sources, which they may not have to pay the tax.

And then when it's distributed, treat it as a non event. The sensible thing to do is to say you treat it as a distribution to the shareholder when it's distributed and you tax it fully. Then if it's never distributed. you never have to impose the tax right now. If you tax it in the corporation, it's never distributed.

Then you have to give somebody at some particular time, not easy to determine [00:03:00] a deduction to offset the gain. So it's just a timing issue. The American law has always taken, I think, a very Yeah. I'm not going to go into too much detail on that, but I can give you a tough view on that. so the general position is if you have two partners who are in some kind of a fight over the distribution of proceeds, they can't make any distributions.

But each of the two partners who's in the fight has to pay a tax on the amount of money that is accrued in the corporation, in the partnership to them, because partnerships are not tax like corporations. What's happened is any money that hits the partnership is immediately treated as if it is owned by the shareholders.

There is no double. Taxation system is there is with corporations, which pay a tax on corporate income. And then there's a shareholder tax on dividends that are distributed thereafter. So you don't do that. it's a very small issue. And the only source of difficulty this in a practical sense is not valuation.

We know what the shares are worth to the penny. The real difficulty is realization and liquidity. If you don't have the money, how do you pay [00:04:00] tax on it? But since that problem is all pervasive, it turns out there's nothing distinctive here. And the court in the 7 2 vote, essentially said under these circumstances.

This is just business as usual. We don't want to bother ourselves anymore with this, and we don't want to reach any larger issues because they're going to open up a can of worms. And to put it mildly, that's 100 percent correct, because the realization has two separate parts to it as a problem. One is the captured money of perfect value.

But then when they started to say, aha, there's a constitutional realization requirement, which isn't satisfied in this case, the government came back and said, Hey, there is no constitutional realization requirement. We can go through the cases. And by the way, we can also tax all the unrealization of corporate stock publicly traded and not publicly traded.

And so if you haven't owned a You pay 100, 000 [00:05:00] for it, and you can impose a tax on the 900, 000 that has not been realized. So the first problem is a 15, 000 problem. Probably nationwide is a 10 million problem. The other is a 10 trillion problem. And why anybody and it would bring a lawsuit to say 15, 000 with the indirect notion of trying to attack the general realization.

Requirement, which doesn't get you very much in terms of overall tax administration. It was a colossal decision. I actually wrote a brief on the side of the plaintiffs, which made the very narrow argument about wait till the distribution to tax it and then spent the rest of my time trying to explain why it is that using Or getting rid of the realization requirement is an absolute business nightmare in cases of ordinary appreciation of capital stock.

the rule essentially should be three parts. The first part should be if you receive cash or marketable securities, i. e. things that you could sell right [00:06:00] away. what you do is you tax people on that stuff as it's realized. The second part of the problem is the converse. These are called non recognition provisions, and under these circumstances, if you receive funny money that is corporate stock that's difficult to value or real estate that's difficult to value, what the Internal Revenue Code does quite wisely is develop rules for quote non recognition.

You've clearly realized again it's Been transformed from one form of wealth to another, but the form of wealth that you see receive is not amenable to taxation. So you have the non recognition, i. e. no gain, and you postpone the gain until those shares are sold or liquidated in some other form that cash becomes available.

This has been part of the Internal Revenue Code since the earliest days, and the thing could not function coherently unless you had these non coherent provisions, which deal with recapitalizations, with reorganizations, with spinoffs, and all the other kinds of stuff that you [00:07:00] have in complex transactions.

But there are third class cases for which the realization requirement is amended. many times what you do is you have highly liquid financial assets. They don't represent real wealth in a corporation doing things. They're just derivatives off of other stocks. So options to purchase and swaps and derivatives are all covered.

And if you did have a realization requirement, somebody would buy two assets, one to buy and one to sell. One would go up and one would go down. And what they would do is they sell the down asset and keep the up asset, and they would therefore manage to have fake losses when there's no reason to do that.

So in all of these cases, you have a financial counting at the end of the year, doesn't matter whether you buy or sell these things, because you could easily get rid of them. And you tax or give a deduction for the net difference in the cost in the current position. This is absolutely essential to a tax code.

And that's what Kavanaugh said. And what happened is. There was nothing whatsoever in the plaintiff's [00:08:00] all positions have to be, realized that counts for this giant exception. And so what you needed to do was to say, look, I want to go after this thing, but the other rules are really there. I don't want to explain the thousand reasons why they're important to have, but I'll reduce it to two points.

You never want to force people to liquidate assets that are productive in order to pay tax. And you never want to put everybody in the position. you have to value what these assets are, which is going to be extremely difficult. You're talking not only about public corporations, but private shares, artworks, suits and litigation, insurance claims, everything under the sun.

You wait till it's resolved and then you tax it. And what happens is they put all of this stuff on the table to think about. And what, Kanji Jackson did in her, concurrence, it wasn't a dissent, is she said, look, and she said, hey, there's no constitutional objection to taxing all this stuff. And the subtext was, Ms.

Warren, you want to come [00:09:00] after this stuff, get your experts together and we could talk about it. Amy Barrett wrote a concurrence, which was much better, the best opinion read, in which she said, I, you look at all this stuff and you realize what's going to happen. And you really don't want to go down this.

realization, get rid of the realization requirement for publicly traded shares of privately held assets and so forth. So you read the two newspapers today in both the Wall Street Journal and the New York Times have as their lead takeaway, hey, you know what happens? The death tax. Whether the estate tax, not the estate tax, the, the unrealized appreciation tax, the wealth tax is still alive and well as a constitutional matter.

Bring them on as the Democrats surely will. you never bring a lawsuit. This suit should never have been brought, to cake 15, 000 in order to set up a large constitutional debate that you're going to lose, which is what they did in this case. What you do is just keep it off the table. And then when somebody wants to talk [00:10:00] about.

the wealth tax or the tax on unrealized income bank later down in the road. What you do is you tell the terror of horrors that start to take place. Once you move in this position, these taxes are suicidal because what you're going to force people to do is to sell property that is productive. there's going to be a huge run for the exit because everybody has to sell at the same time.

The stock market will become completely unstable. People will then, not have taxable gains because when they have to sell this stuff, they'll start getting losses or reduction in the amount of gains given the melee in the marketplace. That's the position you want to have. And any sane legislature of either party should recognize if you want to support either a market state or a welfare state, the systematic destruction of wealth that will take place by putting either of those two into place is a complete and total social disaster.

There's never worked out anywhere else. And if you want to change [00:11:00] things, all you do is you change the rates without changing the structure. And that is the best way to go. My preference is to change them down. The Biden preference is to change them up. but I can have a coherent debate as to whether or not we want the present 21 percent corporate rate.

To go to 28 percent or down to 15%. What you cannot do is have a defensible debate on the other side. If you have to defend yourself against the taxation of unrealized income in corporate shares and other kinds of illiquid assets, as part of this grand program. if the door is left ajar, that is not a calamity, but it certainly isn't a very good thing.

And this is a case which would have been better off if it had never been brought.

Tom Church: I think we're going to be talking about this issue in the future when new ideas are brought up and challenged, right? Oh, yes! Richard, I want to go from the Supreme Court over to the state level, because Louisiana just did something, I think, pretty interesting.

Pretty, shocking a little bit. They passed a law to [00:12:00] mandate that the Tenth Commandments are put in classrooms. public schools across the state. Now, my first reaction is, that can't be constitutional. But, of course, anyone who's done this has probably designed this law with a constitutional challenge in mind.

I'm wondering if they're thinking, hey, this is legal theory as opposed to a religious establishment. Can you help me figure out how this avoids First Amendment concerns?

Richard Epstein: No, I cannot. I think it's a simple answer. they, what you have to do is you have to set up the basic framework and it's a very difficult framework, but the original conception on religion is we had two clauses with opposite purposes.

One of them was the establishment clause and what it said we could not have any official state churches. And when they meant it in the early days, they meant it in a quite literal fashion. Massachusetts had an established church which wasn't abolished until 1832. And what this constitutional provision [00:13:00] said is that the federal government, Congress, cannot establish an official church for the United States.

And that's all good. What happens is what's an establishment then becomes extended. So it's no longer consists of just setting up a designated church. It also seems that any systematic preferences that are given to a religious organizations over non religious organizations or one religion over another violates the establishment clause on a non discrimination principle.

And so in this particular case, what you're doing is you're putting this stuff forward and what you're doing is you're Basically privileging religious information over everything else, and that looks as though it's a preference for religion, and that counts as an establishment. And so it seems to me that it's pretty much unconstitutional under the traditional framework.

Now if private institutions want to do it on their own time, not only is that something which is permissible. It's something that is imperative to allow them to do. [00:14:00] And so you can imagine trying to run a Christian school without having a cross or a Jewish day school without having a star, but don't go very far.

These are religious institutions. They're private. And the real battle in these cases is if they'd start to take public money, does that restrict and affect their ability to use religious instruction as part of their curriculum? A very difficult question. There are further questions about whether or not you could give religious schools vouchers to support them.

The answer today is probably no, and the problem has gotten around by a much more sensible system, which says that when you give grants, you don't give them to the school, you give them to the students, and they can take them to religious and non religious institutions. So what you do is you get a competitive market to see how the surplus is going to be aligned.

I think those things are perfectly okay, and that's fine as well. But on the free exercise clause, it gets a little bit dicey. And so you put this cross up and started one of the rooms in the force 10 commandment. And there's some Muslim students or some [00:15:00] Jewish students. And I don't want to look at that stuff.

What are you supposed to do with them? At this point, you now have a free exercise question. They are forced to attend public schools in some degree, and they are faced with things that they don't like. What is the accommodation? And this was, of course, the issue in West Virginia versus Barnett with the Jehovah's Witnesses and various kinds of idols, that they found offensive.

And the heroic decision in that case was you could stand aside and get out of the room. You don't have to say the Pledge of Allegiance or whatever. And I think that's fine. But as you start going on, people start saying, why is it we want to single these kids out for special treatment, force them to leave the room be subject to kind of discord and disrespect and other places.

What we really have to do is we just have to stop the entire activity as well. And that gets the objection. 95 percent of the class really believes in all this stuff. And now 5 percent has a veto. And that issue is a real tough one, that I can [00:16:00] see. And so what I think in effect in this particular case, since it's so partisan, it's an established that we don't get to the second case.

And remember, there are really difficult problems. you take A school that has all religious symbols up there and has a secular spot. can you, do you have to have what was sometimes called the naked public square where nobody's there? Or do you have to have an equal access program? And the illegal authorities on that issue that cut in both problems.

But I don't think this thing is going to happen. Survive. My guess is the constitutional attacks have probably already begun because there's so many anti religious organizations or separation of church and states organizations that are primed for justice sort of thing. And since the case has come up in a whole variety of different complexes, you don't have to do your research from scratch.

You take out the previous briefs and figure out how you update them. I have not looked at this particular statute, so I don't know if there's some kind of a saving wrinkle. Wrinkles say people who don't want to can just [00:17:00] leave the room. That doesn't work because it works for the Pledge of Allegiance because it's over after a minute or so.

But if this thing is standing there for the entire time, I Then you have to leave the room for your entire instruction in order to avoid the symbol. And so I think I'm one of these crazy kinds of balancing tests that nobody likes and everybody uses. you would find that this thing should be struck down.

I, do not understand why people want to go picking fights on stuff when you shouldn't do it. The correct thing to do, and this is now permissible, is if you have students who have religious activities, what you can do is Give them a classroom or some kind of an opportunity in which they could join together in a club for various kinds of services, making sure that you give similar opportunities to people who have different kinds of inspections and behaviors to begin with.

So the whole thing strikes me as being yet another silly effort. And I always worry about the political implications because somebody says, they say, see what's going on under these deep red states. That's one reason to keep [00:18:00] Joe Biden in the White House. So I'm very unhappy to watch this development and condemn it heartily.

Tom Church: we'll go from Louisiana and end up over in Manhattan, where the Manhattan D. A. has reportedly dismissed the trespassing charges for 30 of the over 40 students who are students and outside people who were arrested, in, at Columbia when they broke into the administrative building, barricaded themselves, were brought, were finally arrested and brought from there.

Some of the charges were dropped, due to, according to Albert Bragg, a lack of evidence, others because they had no prior criminal record, and the Columbia is looking into academic discipline as well. I think a handful, maybe about a dozen, were released on the, or were given the option of we'll release you so long as you don't get arrested in the next six months.

One person is holding charges. So Richard, I just want a quick question. gut reaction from you [00:19:00] on, on this, on, on a DA in Manhattan, letting these, students and outside people as well go after,

Richard Epstein: This is a crazy man. you can't condemn him hardly enough. He spends millions of dollars going after Donald Trump for stuff that took place several years ago.

If he got the maximum sentence, he would be in jail for 110 years. He's not likely to live quite that long. And in this case, it's not a question of evidence. you have the photograph showing people breaking the glass door at Pamilton Hall in Columbia and turning the knob from inside, barricading everything.

What do you mean? You're going to give one free bite to a dog? It's not allowed. You're going to give massive destruction of property cases a complete pass. You can't do it on evidentiary ground. It's utterly crazy to assume that the internal discipline processes of Columbia will do anything other than maybe suspend me for a cent.

If these were other people and this would not that kind of a debate [00:20:00] that is of no political overtone, you'd be going to jail for five, 10 years on these things. And there'd be no reason to have a plea bargain on anything to do. So what you have here is a man who is utterly forsaken his oath of office of equal enforcement of the law.

He's obviously a partisan on the substantive issues. Could you imagine he would do the same thing if it had turned out that what had happened was a bunch of Ku Klux Klan people went into this place? Broke the things down because they wanted to make sure that they could attack black students on campus.

He would never tolerate that happening. He is a public disgrace in office and he should be removed from office. This stuff cannot last because now it's an open invitation for anybody to say, I get one free bite. I better make it a good one because he's not going to come after me. This is unfortunately a pattern that started the federal government.

We had multiple instances of genuine violence, destruction of property, trespass, and all the rest of that stuff in Seattle and in, [00:21:00] where was it? In Seattle and Portland, during the bad days. And Garland comes in and he basically doesn't prosecute anybody there. It's only the people who have selfies at January 6th.

So again, you may think the Capitol is more important than a courthouse and so forth, but you're talking about physical violence. In some cases, the per se wrong. Under any normative theory, getting a free pass by prosecutors, and as far as I'm concerned, that's dereliction of duty. I've read the story in the paper, and as low an opinion as I had upon Bragg, it's now even lower.

It's below zero. It's below unmentionable and unspeakable. The man should resign. This is not decent behavior, and it's an open division to not just mayhem, but to Partisan mayhem, the causes of which this guy actually believes and he's entitled to his private beliefs, but he's not entitled to force upon the rest of the country by essentially exposing them to force and [00:22:00] violence by his particular friends or whether they be on the Gaza issue or anything else.

A national disgrace is what this is.

Tom Church: You heard it here on the Libertarian podcast with Richard Epstein. As always, you can learn more if you head over to Richard's column, The Libertarian, which we publish on definingideasathoover. org. If you found this conversation thought provoking, please share it with your friends and rate the show on Apple Podcasts, Spotify, or wherever you're tuning in.

For Richard Epstein, I'm Tom Church. We'll talk to you next time.

VO: This podcast is a production of the Hoover Institution, where we generate and promote ideas advancing freedom. For more information about our work, to hear more of our podcasts or view our video content, please visit [00:23:00]

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