Well, the analogy is lacking, of course, as all analogies do. But, we have to be clear what we’re talking about.
There’s two different proposals at hand.
There’s the “wealth tax” proposed by Warren, which would be more akin to a property tax.
And there’s the “unrealized cap gains” (UCG) tax that Saint_Cad mentioned in the op. Which is more akin to income tax.
The UCG would tax any increase in net worth as income. So if your stocks increase $50 million this year that would be considered income and be taxed accordingly. If you have no net increase in wealth or a negative one, you would not be in the hook for any taxes. Just like income.
It’s worth it to note, that this proposal is only for individuals who showed an increase of $100 million for three years in a row. And be worth over $1billion. So would apply to very few, but would reap large revenue.
The idea that someone having to liquidate some of their assets to cover their tax bill starting a market downturn just isn’t realistic. Billions are bought and sold everyday with no adverse affects. Indeed, it’s the fuel of the marketplace.
To continue with the incomplete house analogy. If I win a house on a game show, my total tax burden is going to be near 40% the value of the house. And more often than not I will have to sell the house in order to pay the taxes, and nobody’s crying over that.
He could carry the loss forward to cancel future gains or income. And in some cases yes it could retroactively lower his overall tax burden. At least that’s how I understand what has been released of the proposal.
I’ve always found this topic fascinating. My take, after passively looking at it for years, is that we don’t have anywhere near enough information to make judgments about discrete components of tax policy.
I basically set out why in this post, and in the thread containing it (that I started):
I used to negotiate complex contracts for a living.
One cardinal rule was that you had to keep track of every single puzzle piece (and this was before consumer-level spreadsheets were democratized). Otherwise, many negotiations effectively played out as an expensive version of the car sales’ Four Squares.
Writ extremely large.
You were hammering away on one financial parameter. Meanwhile, they simply adjusted another – often not mentioning it, but burying it into the eventual multi-hundred page contract sent your way for signature.
It took extremely conscientious, eagle-eyed business people and attorneys to catch these all-too-common “mistakes.” The penalty for failure to do so was significant.
Meaning: there are potentially thousands and thousands of tax-related knobs and levers to be manipulated, and we all focus on – because we only have visibility into – an extreme few.
That our system provides no material visibility into True Effective Tax Rates is a profound example of manipulation, but it’s surely not a ‘mistake.’
That’s my understanding as well, although details are scant.
Wyden’s proposal from a couple years back treated tradable (stocks bonds etc.) and non-tradable (real estate, business interests, my wife’s Beanie Weenies) assets differently, with a lookback charge and interest on deferred tax when non-tradables are traded.
I’m curious about the specifics and how fast they think they can pull this off.
But this isn’t a wealth tax. This is an income tax that treats unrealized gains as income.
So the real question is - who gets to define income based on the 16th amendment? Congress or the courts? One would assume that those opposed to judicial activism would want the legislature to get to make that call, but we shall see.
Would that be legal? I could see an equal protection lawsuit if the tax code recognizes unrealized gains as income for one group of people and not for others.
True enough, but I do think it’s something that needs to be set fairly high- like in the tens or hundreds of millions of dollars of wealth, so that we don’t start doing stuff like unduly taxing people who inherit land or an old home without actually being wealthy in the sense we’re talking about.
And a light touch would probably be in order; it would still generate plenty of money, but wouldn’t hit overly hard or even reduce wealth much- like maybe 1% a year or something.
This would still raise a significant amount of money - like 340 billion or something if you hit the top 1% with it, which is about 5% of the entire Federal budget.
That would be the trick- how to not do anything crippling or much more than a minor pain in the ass, but that would raise a significant amount of revenue for the government.
In the quest for relieving the middle class of the burden of paying for everything.
Just bring the tax rates back to where they’ve been in the past already.
The CNN article in the OP says, “It would likely only hit those at the very, very top of the wealth ladder, likely roughly 700 to 800 people – those with $1 billion or more in assets or with reported income of more than $100 million for three consecutive years.”
So unlikely to hit those who just inherit an old home or land, unless they inherit half a state.
For now. That definition can easily change. Remember I didn’t get and Covid checks because working 2 jobs to make $100,000 made me rich. And what about when they start taxing people on the unrealized gains on their house because only rich people own homes? I can’t afford to pay taxes on a quarter-million equity that doesn’t generate income.
And if you don’t think that’s a real concern, then why is the middle-class the group hit with the huge tax burden right now when the income tax started to only be on the rich?
That’s… not what happened. Initially everyone paid taxes. The rich paid the highest marginal tax rates (they still do). Then the rich used their political influence to flog the notion that taxes ought to be “flat and simple” and terrified the middle class with “someday YOU might have to pay 90% income tax. How does it feel?” And many of the top marginal brackets were eliminated, giving the rich what they wanted, and throwing the burden on wage workers.
So the middle class are paying more taxes now because so many of the middle class were fooled by the rich-people anti-tax rhetoric that helped the rich and screwed the middle class. In fact you’re providing a great example of that delusion.
A wealth tax is a good idea because it can access the kinds of assets where the rich park their money out of reach, things that the middle class simply doesn’t have.
Are you serious? What does a yacht cost? What is the annual cost of running a yacht? What do 7 mansions cost (see Romney) cost and what does it cost to keep them running? $2 billion is probably a tad high, but $100 million would not astonish me.
One thing that does astonish me is that when someone dies all of the unrealized capital gains go completely untaxed. The heirs inherit with a stepped up basis, so they don’t pay them either. Ever. It is different in Canada where unrealized capital gains get taxed to the deceased as if they had been realized in the year of death. People squeal about this, but it seems more than fair to me.
I have my doubts that any kind of wealth tax, or tax on loans using stock as collateral, would pass the Republican Supreme Court, any more that it could get their votes in congress. Don’t give me any of that crap about them just calling balls and strikes.
If billionaires who are subject to this tax have to sell some of the stock in their very valuable companies to pay it, and the stock is purchased by non-billionaires (not subject to this tax) that seems like a desired social outcome of the people writing the law.
I don’t know what a stepped-up basis is, but I assume it zeros-out capital gains on the inherited shares, which makes sense in a way. But wouldn’t the heirs still be subject to inheritance or income tax on these assets?
Your assumption is correct. It… made more sense when records were harder to come by about original basis. These days it’s largely just a massive untaxed boon to the wealthy.
The estate is subject to estate tax, if there is one. Republicans keep trying to get rid of it (and occasionally manage to for brief periods).
Inheritances are not (generally) taxed as income. Maybe there are some corner cases, but heirs don’t pay income tax in their inheritances.
Well in that case I like the Canadian idea of realizing the gains and the taxes paid on them before distribution to the heirs. I could see some whining about families losing control of a business due to this but that can be planned around.