In the quest for more taxes, the Democrats are considering a tax on billionaires. Here’s the problem - it’s on unrealized gains. That’s right! If a billionaire’s assets increase in value they are liable for capital gains tax on it even if they don’t sell it. So a few questions:
Is this even legal? IIRC we’ve discussed this before and there is a good argument that this would be a direct tax. The IRS can’t just collect a direct tax on the top 1%. Under the Constitution a direct tax must be apportioned to the states proportional to population.
What assets will be taxed? Liquid (stocks, bonds, gold, etc.) or all (property, art, etc.)?
Is it a good idea to tax unrealized gains? That is unprecedented. Plus taxes tend to fall down the slippery slope. So what is the lower limit going to be on taxation? 5 years from now? 10 years from now?
Why wouldn’t it be?
We already pay property taxes, which are based on the value of the property, in addition to capital gains when the property is sold. How would that be different if the wealth is from stocks or bonds or anything thing else?
Pretty much everything the ultrawealthy “own” are “unrealized gains”, often in the form of assets and investments held in trusts or other instruments to make them appear legally cash and asset poor which they have unique access to by virtue of their wealth. If these people can afford multiple superyachts and private space programs, they can afford a few percent of their total wealth to pay for all of the infrastructure, public services, and security that fundamentally allows their businesses to enjoy economic success.
The Founders believed in the wealth tax. Apportionment was designed to reach wealth by taxing states according to a proxy for relative wealth, using the best measurement of wealth that was then available. To turn a requirement designed to make it easier to tax wealth into a rule exempting wealth from taxation is to turn the Founders’ meaning upside down. The progressive idea of a wealth tax, like the estate tax, is clearly constitutional. ■
The obvious thing is that if we want enough funds to run the country, we have to tax the ultrawealthy. Why? To quote Willie Sutton, "because that’s where the money is!"
Why not make the loans that the wealthy obtain using their assets as collateral, subject to the same income tax percentages that everyone else pays? Are there some hidden potholes (besides Republican opposition, duh) to this simplistic approach that I’m not aware of?
If you tax a specific means of wealth increase, those who are affected will likely just move to another means.
It’s the main reason why the ultra wealthy have little or no income to tax.
If you tax their “worth”, by whatever means they arrive at it, it’s harder to avoid the tax.
Because ‘wealth’ is fundamentally different than ‘income’. If you taxed ‘wealth’ at, say, 20% per annum, it would be reduced geometrically, and unless you think that complete ‘redistribution’ of wealth is the ideal (instead of a catastrophic undermining of a market economy) it doesn’t make sense to just kill the goose. The reality is that a very marginal amount of “unrealized gains” invested into the overall economy rather than into speculative ‘investing’ (much of which aren’t even properly investments in any capital sense but are essentially gambling on future valuations or hedges) are completely adequate to upgrade and transform infrastructure, provide necessary public services, and virtually eliminate abject poverty, all without making any measurable impact on the ability of capital to grow the economy and providing returns outpacing any marginal level of taxation. Setting aside all the handwaving about Laffer curves, taxation on wealth (versus income) is actually more equitable in terms of overall distribution of the burden, and an eventual benefit in allowing for economic growth to fund all of the necessary resources and infrastructure that allows for industrialization.
My proposal isn’t taxing their wealth though. It just redefines those loans as “income”. So if a billionaire gets a $5 million loan on his assets, he will have to pay $1,814,427 in taxes (assuming 2020-2021 federal income tax rates), spread out over the lifetime of the loan, in addition to whatever interest they are obligated to pay their lenders.
This wouldn’t reduce their wealth geometrically, and it would also be a much more fair amount for them to contribute back to society.
There’s 2 downsides I see to your solution.
The first I’ve already stated: if you start to tax collateral based loans as income, the wealthy will just stop using these loans. And the banking system will come up with some other way of doing basically the same thing, but just different enough to avoid the taxes.
And, #2: how much “actual cash” do they really get this way? Even the most extravagant lifestyle only needs a couple million in cash each year. So that’s still leaving 99% of their wealth untaxed.
You can’t just say the banks will figure out some other way to give the already wealthy money to spend without giving a hint of what that could be. I happen to like TheGunIsMightierThanThePen’s idea in general… if there is actually a loophole with the whole “borrow money to live on and somehow never have to pay it back because risky assets always go up in value” scheme that seems to be making all the rounds, let’s just close that loophole. The whole idea of taxing unrealized stock gains is absurd.
If Elon Musk’s Tesla stock drops and his wealth goes down $50 billion over a single year, the gov’t would cut him a check for the same amount of tax he paid when it went up $50 billion over a single year?
Does selling part of my depreciating house that further lowers the value of my house to pay for this tax seem like it’s good for my children? Wtf analogy is that to selling stocks to cover taxes of stock that is losing value? Any downturn in the market would just accelerate and everyone loses.
If we implemented your proposal, the super wealthy would all just use option 2 above, since capital gains is going to be much lower than income tax rates.
If you’re suggesting we implement your solution AND tax capital gains the same as income, then it might work, but I’m guessing that’s not what you are advocating. Correct?
The analogy is simply that the government does not give back money that it is given. If your property loses value, you pay less in the future. But you don’t ever get money back.
Perhaps there is some logic for why you think the government should have to give that money back when the property is stocks rather than a home, but it doesn’t seem you have made such an argument. You likewise haven’t seemed to say more than one sentence about why you think the idea of taxing unrealized stock gains is bad.
I may not know a lot about finance, but surely your ideas need more explanation. I seriously doubt that this became an actual proposed idea by the Democrats if the concept was absurd on its face. Surely there must be something you are assuming that they are not.
So why not lay out all of your premises that lead to your conclusions?
Yeah, I can see why the wealthy would all flock to option 2. But the long term capital gains tax rate is 20%, assuming they are selling off more than $441,451 in assets during a year, and that is a lot better than the 0% that the government is receiving currently.
Moreover, it forces the wealthy to hold the assets for a minimum of one year, assuming the resulting meta-game is wealthy people bouncing assets off each other like a game of hot potato, lest they want to pay the higher short term capital gains rates.
If they really wanted to, they could sell all of it at once and live off the lump sum for a while, but that accomplishes a side goal of getting them to divest themselves from their assets.
That would be the more socially equitable option, but I fear it would be too controversial, at least initially. It would be like bringing European-style healthcare to the negotiating table when the ACA was first being hammered out. Baby steps, man, baby steps.
Edit to add: perhaps long term capital gains can be taxed the same as income, only if the person’s assets are valued over a certain amount.