With Democrats now in charge of the House of Representatives and early in the process of trying to retake the White House in 2020, all policy ideas are on the table. Especially given the egregiously regressive tax bill that Republicans passed a bit more than a year ago, tax policy is going to be very much in the mix.

Other than increasing tax rates on upper-level incomes, how might Democrats make the tax system more progressive? One long-debated idea is to change the tax code so that incomes from investments are taxed as soon as they are earned, rather than allowing taxation to be delayed for years or decades (or even, as I will describe below, forever).

In technical terms, this would involve Congress eliminating the “realization requirement,” which delays taxation of income earned when investments in property (such as shares of stock) rise in value until the property is sold or otherwise disposed of.

Whether even a Democratically controlled Congress and White House would vote to tax the rich in this way is an open political question. The more interesting question, at least for me, is whether the current Supreme Court might declare such a law unconstitutional. The basis for doing so is tenuous at best, but the five hyper-conservative justices might do it anyway.

Before I explain how the Court’s right-wing bloc might carry water (again) for the wealthy, however, some conceptual and legal background is necessary. The bottom line is that taxing income from investments is absolutely constitutional, but there is an interesting and perverse path that the conservative justices could take to conclude otherwise.

Wages, Investments, and the Realization Doctrine

Most people earn all of their income from working. Whether we call it wages, salaries, commissions, or whatever, the vast majority of people earn income by selling their labor. When they earn labor income, they pay taxes (on every dollar for payroll taxes, and above a certain threshold for income taxes).

Some people have a few dollars invested in 401(k) plans or Individual Retirement Accounts (IRAs), but again, all or almost all income that people earn is labor income, and all or almost all of that income is taxed in the year that it is earned. No delays, no games.

For the lucky few, however, income comes in large part from owning investments, which is known as “capital income.” Consider a person who holds two million dollars in shares of stock, and the stock (which, to simplify this example, pays no dividends) yields an annual return at the rate of five percent, so that the shares are worth an additional $100,000 at the end of the year. That person has earned $100,000 in income, which is supposedly taxable.

Except that we generally do not tax that income, at least not in the year that it is earned. It is fully exempt from Social Security taxes, and only because of a provision in the Affordable Care Act is some capital income sometimes subject to Medicare taxes. Most importantly, however, the person who is $100,000 richer because of her investments pays zero dollars in federal income tax so long as she does not sell the shares.

What is going on here? For a variety of reasons, Congress long ago chose not to tax the increase in property values as income in the year that the income is earned. Because of that policy error, a person who works for a living and earns $100,000 pays income tax right away, but another person who is $100,000 richer without having worked pays nothing.

The realization concept is based on the idea that the $100,000 gain is not “real” in the sense that the owner of the shares does not have $100,000 cash in hand but merely is richer by that amount. Sure, the person can borrow against that asset, and her net worth is higher by that amount, but Congress has said that the income need not be taxed unless and until she sells the shares. (There are other “dispositions” that can constitute realization events, but cash sales are where the action is.)

This is why income tax returns indirectly hide wealthy people’s true incomes. When Mitt Romney was running for president (and, as was then the norm, released his tax returns), his reported income on his tax forms included only realized gains (the increases in value of property that he had actually sold in a given year) but quite legally omitted all of his income that was unrealized. With a net worth of approximately $250 million, he most definitely had at least ten million dollars of untaxed income (and probably more like twenty or thirty million) each year. None of that was taxed.

There are certainly instances in which one can justify not having someone pay income tax on the increase in the value of something they own. For example, homeowners in a rising market will be pleased to know that the value “on paper” of their houses has gone up, but taxing that gain can cause problems that we might want to avoid.

But for the wealthiest Americans, it would be both possible and fair to adopt a policy taxing all of their incomes in the year that they are earned, even—especially—their unearned income from investments.

It Gets Worse: A Lifetime of Untaxed Gains

But the bigger picture is even less fair than I have described so far. A person with millions in unrealized income will supposedly have to pay taxes at some point, that is, when she finally sells the shares for a gain. But what if she never sells? She can then leave the shares to her heirs, and the tax code pretends that the heirs bought the shares for the amount that they were worth on the day that they were inherited.

To illustrate, suppose that a person paid $1,000 for shares of a company fifty years ago, and those shares went up to $1,000,000 in value this year. The person never sold the shares, so the $999,000 in unrealized income has never been subject to the income tax.

If the person dies in 2019 and leaves the shares to a favored nephew, the heir is treated as if he paid $1,000,000 for the shares—even though he actually paid nothing at all. He can, in other words, turn around and sell them for $1,000,000 and be treated as if he has zero gain. Or, more likely, he will hold the shares and start the cycle of nontaxation all over again.

The estate tax used to be designed in part to tax the wealth that is accumulated in this tax-free way, but Republicans have made sure that that is no longer true. The 2017 tax law made the first $22 million of an estate tax free, so (also because of generous trust rules) only a tiny fraction of estates is ever taxed either as income or upon death.

Is it Constitutional to Tax the Rich by Taxing Unrealized Income?

A mountain of scholarly work exists describing endless variations on plans to tax unrealized gains, including exceptions for homeowners and thresholds to prevent taxation of small investments. My point here is not to bore into those details but simply to say that there are plenty of ways that a Democratic Congress could alter the tax code to collect income taxes from wealthy people’s unearned income. Would that be the end of the story? That is, even if Congress had the votes, would rich people have any recourse through the courts?

This issue came up recently when I was discussing with a non-lawyer friend (who is a tax expert) various ways to address inequality through the tax code, even without increasing tax rates. When I mentioned eliminating the realization doctrine, he recalled a Supreme Court case that, he seemed to remember, declared that taxing unrealized gains is unconstitutional. He was wrong that that case should stand in the way of Congress, but he was wrong in a way that is both understandable and that might point to a way for motivated Supreme Court conservatives to block Congress’s possible future policy choice.

In 1920, the Supreme Court held 5-4 in favor of the taxpayer in the now-infamous Eisner v. Macomber case. The taxpayer there had held shares of Standard Oil of California stock, and when the company declared a “stock dividend” (essentially, but not precisely, a stock split), the tax code required that she be taxed.

In one sense, the majority’s decision in favor of Ms Macomber seems intuitively correct. After all, stock splits themselves do not make a person richer, just as cutting a pizza into more slices does not make the pizza larger. But of course, selling shares for cash also does not make a person richer, because it is only the increase in the shares’ value over time that constitutes income. Realizing the gain means taking income that has gradually accumulated and turning it into cash.

The question in Macomber, then, was not whether the stock dividend itself created income but whether there was any income to be taxed at all. And there most definitely was income, because the taxpayer had been holding stock during the heyday of Standard Oil. Yet the Court’s majority held that income could only be income if it was realized. That is, they said that “income” and “realized income” are one and the same, and thus that there was simply no such thing as unrealized income. Taxing that nonexistent thing, the Court held, was a violation of the Constitution.

The majority’s reasoning in Macomber is simply bizarre, but rather than go through the details here, I will simply point out that legal scholars roundly ridicule the Court’s constitutional reasoning. The casebook that I use for my Federal Income Taxation course, for example, engages in significant understatement in referring to the constitutional analysis in Macomber as, ahem, “discredited.”

The only aspect of the case that is still considered good law is the idea that income must be realized in order to be taxable (not that unrealized income is not income at all). That requirement, however, is merely statutory. That is, there is nothing in the Constitution that requires Congress to adopt the realization doctrine. Congress has, however, made a policy choice to do so. All of which makes the analysis in Macomber in essence a dead letter.

Indeed, the Supreme Court itself in 1940 summarily disposed of the discredited Macomber analysis. In Helvering v. Bruun, a unanimous Court said that the analysis in Macomber was merely meant “to clarify the distinction between an ordinary dividend and a stock dividend.” In other words, the Court said that Macomber merely stood for the proposition that a stock dividend (again, essentially a stock split) is different from an ordinary dividend (which is when a company sends cash to shareholders).

Well, of course those are different! The Bruun court thus subtly mocked its own precedent, limiting Macomber not merely to its facts but to the most trivial of those facts.

Even so, the Supreme Court has never formally overruled Macomber. And that means that there is precedent to the effect that unrealized income is not income at all. What would a sufficiently motivated group of conservative Supreme Court justices do with that today?

The most famous analogy here is to the reviled Korematsu case, the 1944 decision in which the Court approved the detention of innocent Japanese-Americans during World War II. That case had never been formally overruled, either, until the Court’s conservative bloc in 2018 approved of Donald Trump’s Muslim immigration ban.

A searing (and completely correct) dissent from Justice Sotomayor invoked Korematsu, which made the conservative justices uncomfortable enough that Chief Justice Roberts wrote defensively:

Korematsu has nothing to do with this case. . . . The dissent’s reference to Korematsu, however, affords this Court the opportunity to make express what is already obvious: Korematsu was gravely wrong the day it was decided, has been overruled in the court of history, and—to be clear—“has no place in law under the Constitution.

Nearly everyone who knows anything about the constitutional analysis in Macomber would say the same thing: that it was wrong when it was decided, that is has been overruled by history, and that it has no place in law under the Constitution. Importantly, even scholars who think that the realization doctrine is a good idea as a matter of policy would admit that Macomber makes a complete hash of its constitutional analysis.

But as a never-overruled decision, could Macomber provide an avenue for the new, even more conservative version of the Roberts Court to strike down an act of Congress to tax unrealized gains? We might never know, because Congress might never make such a policy decision. I would not, however, bet a lot of money that the Court’s conservatives would be restrained in inventing a constitutional doctrine to save the rich from having to pay taxes the same way that everyone else does.