A dangerously dumb, terrible tax idea
A tax on unrealized capital gains, if it passes constitutional muster, will lead to really terrible, unintended results, even if it's intended for billionaires.
President Joe Biden’s giant spending spree has spawned a really terrible idea, and it looks like it’s going to survive negotiations with the less leftist Democrats. Speaker Nancy Pelosi said Sunday on CNN, “We probably will have a wealth tax.” Specifically, she’s talking about a tax on unrealized capital gains—the value of things that have not yet been converted into money—on the staggeringly rich.
“I wouldn’t call that a wealth tax, but it would help get at capital gains,” Treasury Secretary Janet Yellen said. She added that unrealized gains make up an “extraordinarily large part of the incomes of the wealthiest individuals and right now escape taxation until they’re realized.” With full respect to Yellen, what she said is not true.
The value of unrealized gains is not a way to “escape taxation.” It’s simply the value of things at any given time, which, until those things are sold, are not income, unless you pretzel the definition of “income” to include non-fungible goods, like houses, land, and securities. Now, wealthy people do in fact use their wealth to generate cash, by borrowing against the value of those things. The interest on complex financial instruments available to the super-rich is less than the opportunity cost of selling an appreciating asset, so in fact the rich do make money on unrealized gains, but indirectly through debt.
That doesn’t mean the same principles don’t apply to the average American homeowner. If the real estate market is red hot, and you bought your house for $200,000 twenty years ago, and it’s now worth $500,000, you can borrow against the increased appraised value of your home. People do it all the time. In Atlanta, a house can appreciate 10 to 20 percent in a year, which is enough to refinance equity on a low down payment and eliminate private mortgage insurance. This means a homeowner could generate $20,000 in spending cash (tax free) and still have a lower mortgage payment without spending a dime of their own cash or selling the house. Scale this up by a few hundred million, and you’ve got the billionaire tax scenario.
According to the Wall Street Journal, the “Wyden tax,” named for Sen. Ron Wyden, who came up with this dying duck of an idea,
…capital gains would be taxed annually based on how much assets have gained in value. Now, by contrast, gains are taxed only when assets are sold and at a top rate of 23.8% instead of 37% for ordinary income.
“It would be a huge change,” said Lily Batchelder, who was a tax-policy aide to President Obama. “It would be a really big shift in our income-tax system.”
Of course, there are logistical questions. What happens when assets which have already been taxed lose value? Does the taxpayer get a deduction or a credit? How do assets pledged or encumbered as debt collateral get taxed?
There are also unintended consequences, which I could go on about at book chapter length. If assets are taxed by their gain, the super rich will act to insulate themselves from those gains, while preserving the value of the assets. For people who hire lawyers by the bushel, this will not be difficult to do. Capital will flow in exotic and unknown directions. Consulting markets will pop up offering tax shelters for appreciating assets. Offshore havens will compete for American capital. Companies like Tesla Motors, with trillion dollar valuations, will suddenly act against shareholder interests to protect their billionaire backers.
The largest American companies, which are also the most valuable companies in the world, will suddenly find themselves steered into apparent poverty, while their fabulously wealthy board members shelter their wealth from the tax man, and the 401Ks, pension funds, and IRAs of the hoi polloi like you and me take the loss. How do you like them apples?
Getting into the weeds, to apply an income tax to something that isn’t obviously income, Democratic lawmakers will have to redefine the word itself. The New York Times reported:
The Wyden plan would require the very wealthy — those with over $1 billion in assets or three straight years of income over $100 million — to pay taxes based on unrealized gains. At that tier of wealth, the logic goes, the usual considerations arguing against a so-called “mark-to-market” capital gains tax don’t apply. Those are sophisticated taxpayers with access to loans or other source of liquidity, for example, who hold assets that for the most part can reasonably be valued annually.
The law will have to thread a constitutional needle, defining the wealth of the wealthy as “income” but not for everyone else. The Constitution is as clear as mud when it comes to categorizing taxes, and how to define “direct taxes” which must be apportioned. The 16th Amendment gives the federal government power to tax income “from whatever source derived” without apportionment. Defining the ultra wealthy “mark to market” value gains of securities as “income” but not the gains on land and other hard assets, or also including the securities of those who fall below the wealth threshold is going to attract legal attacks like a bucket of chum in shark-infested waters.
The problem here is that the Supreme Court, where any case like this will likely head at supersonic speed, might yield to the government’s definition, depending on who argues, and how the case is argued. The Wall Street Journal did a bit of its own parsing.
But the rule on direct taxes is still in the Constitution, and the courts haven't fully defined what is and isn’t a direct tax. A federal tax on land or a $500 per-person tax would both be considered direct taxes that must be apportioned. Excise taxes, such as those on tobacco and alcohol, haven't been considered direct taxes. Neither have estate taxes, which are considered a tax on the transfer of property, not a direct tax on property itself.
If the Court rules that the Wyden tax is not a wealth tax, but more like an excise tax on market access for the wealthy, this will open up a rich (pun intended) vein of tax revenue for Congress, which both parties will not be able to resist mining. Once the door is open for Washington to tax assets based on their illiquid market values, the threshold of who can be taxed will be an irresistible temptation to ratchet down, and down, and down, until everyone’s unrealized capital gains get taxed.
This is an idea so bad that even France abandoned it.
Tell me, when has Washington ever found a tax it didn’t expand, twist, grow, and loophole into an unrecognizable mass of lawyer-friendly, lobbyist-inspired pork? This last bastion of wealth accumulation, the unrealized gains tax, once raped, will find itself forced into permanent prostitution, with Congress as its pimp.
If the Wyden tax passes, the Supreme Court would be wise to kill it quickly. However, the Roberts court is more likely to protect its own turf than to correct Congressional mistakes (unless it’s Obamacare).
Then again, if the tax passes without a single Republican vote, and finds its way into the pockets of billionaires, Republican candidates can use the outrage and fear it generates for us regular folk as a campaign issue. They get a freebie because they can campaign on it without admitting they also like it.
What’s best for the nation, is that this terrible idea never makes it into law. If it does, the Supreme Court needs to kill it. If they don’t, we are all on the road to hard times.
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I have no doubt that my perspective will not be well received by The Racketeers, but I have long found it irksome that we have only 7 marginal income tax brackets. I believe we should have many more brackets up to as much as 90-92%. In 1952, When the highest marginal income tax rate was 92%, there were 24 tax brackets with the 24th bracket being $200,000 and above for filing single and married filing separately and $300,000 and above for head of household. Adjusted for inflation the equivalent of $200k in 1952 is $2,070,264.15 today and $300k is $3,105,396.23. The Forbes 400 did not exist back then, but the Mellon family was one of the richest families at that time. Adjusted for inflation, the Mellon family fortune estimated at $1.6-2.8 billion, back then, would be the equivalent of $16,562,113,207.55-$28,983,698,113.21. I think it is ridiculous that we are dithering around with 7 tax brackets with the highest marginal income tax bracket of 37% on incomes $518,400-single, $311,025-married filing separate, $622,020 married filing jointly, and $518,400 when $622,020 in 1952 was the equivalent of $60,093.78 and the beginning bracket of 10% on head of household, $0-14,100 with the equivalent of $14,100 being $1,352.00 in 1952. It is ridiculous that people earning $622,020 are in the same tax bracket as Bezos, Musk, Gates, etc.
The tax rate on corporations in 1954 was reduced to 52% and Eisenhower was not in favor of reducing it below 47% (see transcript of his March 15, 1954 radio address). The Republican Party has rejected the egalitarian principles of the days of Eisenhower.
The GOP of the last 40-50 years has not supported the role of government that the Eisenhower Republicans did. Some of the things mentioned by Ike in his March 15, 1954 radio and television address are renounced as socialism by today's GOP.
Per Ike, "But while we are insisting upon good management and thrift in Government, we have, at the same time, asked the Congress to approve a great program to build a stronger America for all our people.
So let me give you some examples of the things we want to do in this program:
We want to improve and expand our social security program.
We want a broader and stronger system of unemployment insurance. We want more and better homes for our people. We want to do away with slums in our cities.
We want to foster a much improved health program.
We want a better and a lasting farm program, with better reclamation and conservation.
We want an improved Taft-Hartley Act to protect workers and employers.
We want wider markets overseas for our products.
We want--above all--maximum protection of freedom and a strong and growing economy--an economy free from both inflation and depression.
Most of these things cost money. Without adequate revenue, most of them would be abandoned or curtailed."
I don't have a clue what MAGA actually meant. It certainly didn't mean investing in infrastructure, education, and people in order to put the US back at the top.
Democrats are putting energy into infrastructure, healthcare, and wages (Things supported in the Eisenhower days). Republicans won't have anything to do with it. They have spent decades trying to prove to Americans that "Government is the problem," while we have fallen behind in education, technology, transportation, manufacturing.
At the beginning of this century, China had no high speed rails. Today, they have the world's largest network of high speed rails. They began construction in 2008 and now have 23,500 miles of rail line criss crossing the country and it will be doubled by 2030. China has constructed "The Iron Silk Road," which connects China to Europe.
And in the news, just recently, China blindsided us with their hypersonic missile technology. We lost our competitive edge decades ago. Our country is so bassackwards, it will take a long time to stage a come back. Eisenhower era taxes would go along way to helping us claw our way back, if ever.
This nation has sacrificed its future to the gods of corporation. China can do what it is doing because they have the manufacturing capabilities thanks to greedy American corporations. We are predominantly a service economy, established to meet greedy consumer demand from nail salons and restaurants, to retail and warehouses. Low wage jobs reign. Young people are being relegated to permanent renter class, whole, newly constructed neighborhoods are being purchased by investment groups and the homes put up for rent. It is all BS and it all seems to be whole heartedly endorsed by Republicans and numerous moderate members of the Democratic Party.
Excellent, I concur Steve. I think judging by the responses you've received, shows the ideological differences between some of your readers. I've long been a proponent of a flat income tax, or a general consumption tax, with most deductions and credits abolished(save a few to maintain Constitutional muster). I also generally favor a major retrenchment of federal entitlement programs, with the burden of responsibility for entitlements being shifted to states. If the populace in the latter want them, then it is up to these governments to raise taxes accordingly. Many Americans who favor a massive entitlement state(especially those on the hard progressive left and populist right), especially those that love to demagogue the affluent, often dream up of constitutionally dubious federal wealth taxes on the latter, as a means of funding their proposals. If this is what they want(and I don't), then they should just add higher marginal tax brackets or raise the percentages as well as the scope of the brackets. And lower to middle income Americans also should have their taxes increased in proportion to the costs of entitlements they seek to benefit from.
One of the reasons many Americans clamor for government entitlements, is that most of them do not bear the costs for such entitlements, as opposed to the more affluent. That is why they willingly vote the largess of the federal treasury, without experiencing the consequential effects of it to their pocketbooks. One of the reasons why the Nordic countries of Europe are able to sustain their welfare states quite well, is that almost everyone pays high taxes from the less affluent to the wealthy. The highest tax brackets in these countries are levied on income levels that fall well within the middle class. Increasing taxes for lower to middle income Americans as a response to proposals to expand the federal programs would allow Americans to have an honest cost-benefit analyses to whether such programs are worth the expenditure, or not.