Is Taxation of Capital Income Unconstitutional?

Bruce Bartlett reports on a recent appeals court decision:

In the case, a woman named Marrita Murphy was awarded a legal settlement that included compensation for physical injury and emotional distress … Murphy argued that just as compensation for physical injuries only makes one whole after a loss, the same is true of awards for emotional distress. In short, it is not income within the meaning of the 16th Amendment to the Constitution. The appeals court agreed, ruling that Murphy’s award for emotional distress is not income and therefore not taxable.

Bruce then opines:

But because tax analysts implicitly accept the Haig-Simons definition of income, even though it appears nowhere in law, there has been a long-term tendency for the IRS to push the limit of what can be considered taxable income. Now, a federal court has said there is a constitutional limit. I would like to see the court go further in regards to the question of whether interest constitutes income. To economists, some portion of the interest we receive on our savings is merely compensation for loss – loss of the immediate enjoyment we would receive if we consumed our income today instead of saving it.

Conservatives have been pushing for a tax system that does not tax capital income for years with limited success in getting Congress to go along. Of course, the Reagan-Bush43 philosophy seems to be to defer any decisions on how high to push employment taxes. Bruce doubts that the Courts will rule the taxation of capital income to be unconstitutional, but if they do, young workers should expect to be much higher tax rates on their labor income in the future.

Update: Mark Thoma asks the appropriate counter-question:

Why can’t wage income also be viewed as making a person whole for the sacrifice of working all day, or, in the language of the article, as a reward for delaying leisure (you can’t go to the beach today if you work)? Being made whole for giving up consumption is not fundamentally different from being made whole for working, i.e. for giving up leisure.

At the end of the day, as long as we vote for governments that spend what they spend – SOMEONE has to pay the taxes. Given that Bruce is one of the conservatives who recognizes this fact, he has some ‘splaining to do. LUCY!