Taxing Unrealized Capital Gains: A Bad Idea That Just Won’t Die

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Vampires are — so the stories go — extremely difficult to kill, and so it’s somehow appropriate that the same is true, but in reality, of predatory tax proposals.

The Wall Street Journal

President Biden expressed support for a proposal under consideration in the Senate to place an annual income tax on billionaires’ unrealized capital gains.

The potential tax increase, being pursued by Senate Finance Chairman Ron Wyden (D., Ore.), would be among a number of tax provisions that Mr. Biden is seeking to pay for a proposed $3.5 trillion spending plan that encapsulates much of his first-term agenda. It is an alternative to some administration tax ideas that have flopped in Congress, and it would generate money from the wealthiest sliver of Americans, whose incomes can be a fraction of their wealth.

It is not unknown for a tax to begin life by being levied on “the wealthiest sliver of Americans,” but, over time, for it to catch more and more people in its web. As I wrote in March in response to a wealth tax proposed by (surprise!) Elizabeth Warren:

When a “permanent” income tax was introduced after the passing of the 16th Amendment, there were not many victims, and they didn’t suffer much. Less than 1 percent of the population paid income taxes at the rate of only 1 percent of net income. I understand that changed.

Back to the WSJ:

The idea is that for billionaires only, annual gains in wealth would be treated as income. So under current law, someone whose net worth rose to $22 billion from $20 billion and sold nothing would have no income. Under Mr. Wyden’s proposal, that person would have $2 billion of taxable income.

One challenge for the proposal is that it would need to deal with losses, and the prospect of the government sending large checks to billionaires is politically unappealing. Lawmakers could allow deductions for annual losses while also imposing limits on those deductions or allowing them to carry forward to offset gains in future years.

Mr. Wyden has been working on the idea of annual taxes on unrealized gains for several years, and its adoption would mark a significant change to U.S. tax law that would redefine taxable income for a few hundred people. It would affect billionaires such as Jeff Bezos and Warren Buffett.

There is no official revenue estimate yet, but a similar proposal targeted at a larger group—the top 0.1% of households—would raise about $750 billion over a decade, according to a 2019 estimate from tax professors Lily Batchelder and David Kamin, who are now both senior Biden administration officials.

So the first hint of the future extension of such a tax is already there. The Wyden proposal affects a “few hundred” people, but the Biden administration contains two academics (it’s always worth remembering that class warfare is primarily managed from within the elite) who had already proposed something similar for the top 0.1 percent of households, still a tiny number, but the ratchet has to start somewhere.

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The authors of the WSJ report (Ken Thomas and Richard Rubin) highlight other practical difficulties with such a tax:

The proposal would be very difficult for the Internal Revenue Service to implement and enforce, partly because of the challenge of valuing illiquid assets, said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation. The resulting revenue stream could be volatile, and the proposal could make it harder for founders of large companies to maintain control….

The system doesn’t need to be perfect in addressing every complexity, and policy makers should focus on making it easy to administer and hard to avoid, said Ari Glogower, a tax law professor at Ohio State University.

“You want to design a system that’s going to raise revenue and avoid the most substantial gaming opportunities,” he said.

Translation: We need to stick it to the taxpayer.

There are plenty of other objections to taxing unrealized capital gains and, writing back in 2019, David Bahnsen responded to an earlier, broader (“millionaires and billionaires” were to be targeted) Wyden proposal with a thorough demolition job here.

I’d add this to what David had to say. A tax on an increase on unrealized (and, of course, possibly ephemeral) gains is only on the most stretched of interpretations a tax on income. In reality it is a tax on wealth, and one thing that wealth taxes do is redefine the relationship between the individual and the state. To be sure, it is “only” a tax on a portion of a wicked billionaire’s wealth, but (to repeat myself) the ratchet has to begin somewhere.

As I tweeted here:

A wealth tax is a sophisticated, lighter touch derivative of feudalism, but the core of it is the same: The state (“the king”) has, theoretically, a call on everything you own.

That’s not where we should want to be headed.

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