Taxing Unrealized Capital Gains: The Debate Continues
Introduction:
Vice President Kamala Harris has proposed a tax on unrealized capital gains as part of her campaign platform. The plan, supported by President Joe Biden, aims to increase taxes on individuals with a net worth above $100 million. However, the proposal has faced opposition and questions about its constitutionality. This article will explore the key arguments and concerns surrounding the taxation of unrealized capital gains.
The Complexity of Valuing Illiquid Assets:
One major challenge of implementing a tax on unrealized capital gains is the valuation of illiquid assets, such as private businesses. Garrett Watson, a senior policy analyst at the Tax Foundation, highlights the complexity involved in accurately assessing the value of these assets. The IRS would need to ensure that the tax is calculated and paid correctly, which could be a difficult task.
Refunding Losses and Optics:
Another issue raised by critics is the government’s obligation to refund losses faced by investors during a downturn. Watson points out that in such cases, the government would need to write checks back to billionaires, which may not be perceived well by the public. This aspect of the proposal raises concerns about fairness and the optics of the tax plan.
The Case for Taxing Unrealized Capital Gains:
Advocates of taxing unrealized capital gains argue that it will limit tax breaks for wealthy individuals. The Institute on Taxation and Economic Policy (ITEP) defends the proposal, stating that the current tax code is more lenient on extremely wealthy individuals. By taxing unrealized gains, the tax system would be fairer and more equitable.
Criticism from Former President Trump:
Former President Donald Trump criticized Harris’s plan, suggesting that it would create opportunities for appraisal companies to profit. He argued that wealthy business owners may be forced to sell their companies or assets to pay taxes if they lack the funds to do so. Trump also expressed concerns that such a tax could lead wealthy individuals and corporations to leave the United States for other countries.
The Potential Expansion of the Tax:
While the Biden administration insists that the tax would only apply to a small percentage of the population, there are concerns about future expansions of the tax under different administrations. Adam Michel, director of tax policy studies at the Cato Institute, warns that Harris’s proposal sets a dangerous precedent that could lead to more aggressive tax increases. He argues that this tax is not only an attack on the wealthy but also on investment, innovation, and economic growth.
Defining Income and Effective Tax Rate:
Advocates of the new tax plan argue that the definition of income should include a taxpayer’s annual change in net worth, including unrealized capital gains. The proposal suggests a minimum effective tax rate of 25 percent for individuals with a net worth over $100 million. Even if assets are not sold, wealthy taxpayers would still owe taxes on capital gains each year.
Constitutionality and Comparisons to Property Taxes:
Some critics, like Senator Mike Lee, question the constitutionality of taxing unrealized capital gains. However, supporters of the plan compare it to property taxes, which already account for value increases. They argue that taxpayers already pay taxes on unrealized gains in the form of property taxes when the value of their homes increases.
Disagreements Within the Democratic Party:
Within the Democratic Party, there are differing opinions on the proposal. Representative Ro Khanna, a Harris campaign surrogate, disagrees with the plan, stating that it could discourage investment in startups. He argues that taxing unrealized gains may force entrepreneurs to sell their companies prematurely, negatively impacting the startup ecosystem.
The Father-Son Feud and Investor Discontent:
Senate Finance Committee Chairman Ron Wyden initially proposed taxing unrealized capital gains in 2021. However, his own son, Adam Wyden, a hedge fund owner, criticized the idea, suggesting that policymakers lack firsthand experience in running a business. This highlights the discontent among investors who believe that the proposal could compromise the strength of the U.S. capital markets.
Harris’s Departure from Biden’s Budget Proposal:
Vice President Harris recently proposed a new capital gains tax rate of 28 percent, which is higher than the current rate but lower than Biden’s budget proposal. While she has deviated from Biden’s plan in this aspect, Harris has not indicated any intention to back down from the proposal to tax unrealized capital gains. She has also unveiled other economic policy goals, such as an increase in the tax deduction for startup costs.
The Revenue Tradeoff and Political Challenges:
Implementing a tax on unrealized capital gains presents a revenue tradeoff that poses a challenge for politicians. While there is a strong incentive to address the issue, the tax plan is estimated to reduce federal revenues by over $4 trillion over 10 years. This poses a significant challenge in finding a balance between revenue needs and the potential economic consequences of the tax.
Conclusion:
The debate over taxing unrealized capital gains continues to generate strong opinions and concerns. While proponents argue for a fairer tax system and the limitation of tax breaks for the wealthy, critics raise constitutional concerns and warn of potential negative effects on investment and economic growth. As Vice President Harris proposes her own tax rate, the future of the tax on unrealized capital gains remains uncertain. However, the conversation surrounding the topic highlights the complexities and challenges associated with implementing such a tax.
