I could have sworn what when it passed, Congress allayed everyone’s fear of being taxed by saying it would only be on the rich. I looks like it started out that way in 1913 but that WWI quickly changed that into everyone paying taxes.
I for one would favor this approach rather than taxing unrealized gains while alive. The problem is with estate planning, trusts, etc. the rich can avoid this.
In fact, I think this is why we need to radically simplify our tax system. You make $X you pay $Y. No exemptions, no tax breaks, no married rates vs single vs head of household. Capital gains taxed as regular income. When you die, it is like your assets are sold to your heirs meaning the estate must pay tax on the profit earned during the decedent’s ownership time and as a trade the heirs get the assets at the new cost.
Along with this, redo the tax rates to help the poor/middle class. For example, starting at $30,000 you start paying tax and the tax rate progresses linearly until at $230,000 you pay 40% in taxes. In this example if you make $130,000 you would pay 20% of that or $26,000 in federal income tax.
That seems like a good solution.
Yes and yes. That is what stepped up basis is and the estate (not the heirs) is subject to inheritance tax. But there are many ways of avoiding or limiting that too.
Also known as a wealth tax. Let’s say my father bought a Mickey Mantle rookie baseball card in 1952 for 5 cents in a bubble gum pack. He has kept it until this day and the going rate is $25,000.
Until and if he sells it, it is an unrealized gain. It is an asset of his and it represents wealth. If you decide to tax him on that baseball card, you are taxing him on his wealth. You are not taxing him on any income at all because he has the exact same possessions (related to the card) as he did since 1952. There has been no income as a result of that.
To call such a thing a wealth tax and to say that it is not an income tax is simply protecting the meaning of words and the limits of the Constitution, a far cry from judicial activism.
The current proposal is a wealth tax in so far as it’s taxing something that is not traditionally considered income. But that’s the point. To expand the definition of what is considered income. Or, more precisely, to remove the artificial restrictions put on income over the years.
Your dad’s baseball card would not be taxed on it’s value, but only on any additional worth it brings to him in the year. It would not be taxed at the $25,000 value but at how much it had appreciated over the past year. And unless your father is a billionaire whose seen his worth increase by more than $100m for 3 years in a row, he would not be taxed at all.
But, this hints at a good criticism of the proposed plan.
How do you assign value to some things?
For things like stocks and bonds there is an accepted market value. But for collectibles the market value can vary wildly from source to source. It would force the govt into the position of being expert sports memorabilia or art appraisers. And in some of the more volatile markets; when you value something or how you determine it’s average worth can be very significant.
Will SCOTUS agree with that end-around the Constitution though?
How is that an end around?
The 16th says
The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived,
(my bold). What difference does it make if I am paid in dollars, Bitcoin, stocks, baseball cards, Rembrandts, or beanie babies? Any of it can be defined as income. Just because, in the past different types of income were taxed at different rates or deferred until future times doesn’t mean those rates can’t be changed or that the deferment rescinded.
SCOTUS has had differing opinions on this over the years. And, no doubt, this tax proposal would spawn more cases, but the court has over the years, broadened it’s definition of what is income or increase in worth. Check out:
No, the way it is supposed to work for assets without a market (art, collectibles, real estate) is that the tax is assessed at the time the item is sold, with the taxable gain increased by an amount to account for the unpaid unrealized gain tax (amortized over the years the unrealized gain should have been paid).
So if you sell the card and realize a $1mill gain 5 years later, you pay the capital gains on the sale, plus what you should have paid over the previous years, assuming linear gain over those years (or something like that - the real formula may be more complicated).
This court? Probably not.
I’m not sure I agree that it is an end run. Initially the SCOTUS ruled that realized capital gains weren’t income. At various points they have said that dividends are not and then are income.
Honestly, it’s probably another situation where you can read it how you want, and judges will back into their ruling however they see fit. It happens when you are dealing with a constitution from 1789 and an amendment from 1909.
There are rulings from the 1800’s (Springer v. United States - Wikipedia, for example) that state that the only direct taxes are taxes on real estate and slaves, at least as the founders intended it. That ruling cites Alexander Hamilton.
Other rulings, of course, invalided those earlier income taxes, giving rise to the 16th Amendment.
There have been rulings since that have stated, basically, that all the 16th did was return the power to Congress that it already had but that previous rulings had unduly curtailed. Restating that “direct taxes” as intended by the founders were taxes on real estate and slaves.
That’s the way it’s supposed to work now. The proposal proposes to change that.
No, I don’t think you follow me (or maybe I haven’t heard the latest).
Now you pay the gain when you sell. (Sale Price - Basis) * CG_Tax_Rate = Tax_Owed.
Under this proposal, when you sell an illiquid asset, you pay the typical Capital Gains tax, but you also pay a surtax that is calculated to claw back what you should have paid assuming the asset appreciated each year during the period you held it.
So something like: (Sale Price - Basis) * CG_Tax_Rate + (Sale Price - Basis) / Years_Held * UCG_Rate = Tax_Owed
For liquid assets you mark them to market and pay the tax on the net appreciated amount each year.
Obviously you cancel out loses from gains, and I believe you would be allowed to carry losses forward.
In the end it’s probably not worth the added hassle in reporting, auditing, etc. And SCOTUS will probably knock it down. So I really wish the Dems would just get onboard with the House tax plan and revoke some of the Trump cuts and call it a day.
Ahh, I see…
That’s not my understanding of the proposal.
The new unrealized capital gains tax would levy annual taxes on assets while they still have not been sold. The impacted assets include stocks, bonds, real estate, and art.
.U.S. President Biden Unveils Unrealized Capital Gains Tax for Billionaires - SWFI
This is a terrible idea for many reasons, including that it will heavily distort the economy.
Let’s say you own a highly variable stock. On Dec 31 it jumps and you make ten billion dollars in unrealized gains. On Jan 1 it drops back to where it was. Now you owe tax on $10 billion that you don’t have, never used, and gained no advantage from.
The net result of possibilities like this is that growth stocks, which are highly volatile, will lose value. Any calculation of ROI now has to include the possibility of a tax hit purely due to volatility. The more volatile the stock, the more it will be discounted by potential tax liability. Risk will be punished.
The second unintended consequence will be capital flight. The U.S, has gained a lot from its billionaires, and many of them are in the U.S. precisely because of lower taxes. This would chase s lot of them away. Billionaires have the resources to locate wherever they want. Ask New York.
Are you going to allow them to offset with unrealized losses? If not, that is really unfair. But if you are, that will add volatility to the US budget, and always at the wrong time. Every time the market crashes, billionaires will file their losses and the government will not only lose any billionaire taxes that year, but will also be on the hook to pay back previous years’ taxes, at a time when it needs revenue the most. Just think how much people will love hearing that the economy tanked and they lost their job, but the government has no money because it had to pay off a bunch of billionaires for money it took when times were good.
Yet another unintended consequence is that the government will have a vested interest in pumping the stock market. This type of tax essentially makes the government a stock speculator, except with the power to influence the game. For an example of a simple thing they could do - plan any announcements of interest rate hikes after the fiscal year end, or suppress bad economic news until the FY has ended. Or, it could give them the incentive to continue low interest rates and quantitative easing long past the point where it is reasonable. Any government action that may lower the stock market (say, fiscal tightening to stop inflation) will cost the government tax money and therefore be less likely to be done. And of course, because investors expect that behaviour they will react tomit, further distorting stock price movements and investments. For example, any stock held by billionaires that went up in price during the first part of the year is more likely to be sold off before year end. Let the gaming begin.
The other day Hertz announced it was buying 100,000 Teslas. Tesla share prices jumped, and Elon Musk’s net worth jumped $50 billion. But he didn’t see any of it, and it’s likely that the share price will drop back down again. But had this happened at the end of the FY and the tax on unrealized gains was 10%, Elon would be on the hook for $5 billion in taxes. Elon Musk does not have five billion in cash. He doesn’t even have $20 million in cash. He had to borrow money to pay off a settlement of that amount a few years ago.
So Elon would have to sell shares to pay off the tax bill. That would eventually cause him to lose control of his own companies.
Then there’s venture capital - often provided by the very rich. They invest in startups because they are moonshots - you lose 9 out of 10 times, but the tenth time more than makes up for the losses. Add this kind of wealth tax in the mix, and investment capital will dry up for the most risky plays. Say, SpaceX when it started.
We need billionaires. We need alternate sources of ideas and capital, as many as we can get. We need people rich enough to do big things. Because if you put all your hope in the government, prepare to be disappointed.
And the same goes for huge legacy corporations. They become inefficient and bloated and bureaucratized, and stop innovating and focus on buying up competitors and capturing government instead. The only thing that keeps peoole honest is innovation, entrepreneurs and competition. And unless you want to limit that competition to small business, you need billionaires.
People greatly over-estimate how much money billionaires have, compared to governments. The total wealth of America’s billionaires is about 4.5 trillion dollars.
Put another way, the ‘infrastructure’ and 'reconstruction bills together are worth more than all the assets of American billionaires.
However, the vast majority of that is paper wealth due to shares in companies. How much of that could you force them to sell each year before you cratered the stock market? If you could extract 1% of that wealth every year without harming the economy, that’s $45 billion. Guess how long that would run the government? A little over 2 days. If you took 10% of their money, you’d kill markets, destroy their gains and you’d get nothing next time. If you kept trying, in ten years there woild be no more billionaires. That means no more future Microsofts, Qualcomms, Teslas, SpaceX’s, Amazons, or any of the other giant tech corporations that have made the world a better place, because they all took enormous amounts of private capital to stand up and grow.
You all want to kill the goose that laid the golden eggs, because it just looks so tasty.
Ok…
I see my error. The proposal would create 2 separate categories. Those that are traded on exchanges and those that aren’t…
So securities and the like would be taxed on a yearly basis and the other stuff would still wait until it was sold.
Great. So you own a house that went up in value from $1 million to $2 million in 1980, but stayed the same since. If this tax had been in place then. you owe the government 40 years of back taxes on $1 million at 3% interest. That’s 2.32 million dollars. So it gets capped at $49% of the sale price, and the government therefore gets every nickel of increase.
Now play that game in an inflationary period. Let’s say inflation is 10% per year and interest is 12% - a situation we’ve been in before. Now you buy a house for $1 million. In ten years, the house is worth $2.71 million. So the value increased 1.7 million. Then you sell the house. In real dollars you make nothing. But without indexing for inflation your paper profit is 1.7 million, and your interest on tax owing about 1.6 million. Assuming the tax is capped at 49% of the ‘gain’ including interest, you just lose half the value of your house to tax. If interest is outside the 49%, you lose everything.
Except, of course, it only applies if you have a net worth of $1 billion and income over $100 million. So you’ll probably be OK on your $1.7m house sale…
As to your previous example of a stock that goes up and then back down, I suggest you read the earlier article about how the plan would be implemented in the case of an unrealized loss. The answer is, of course, yes unrealized losses will cancel unrealized gains. And unrealized losses can also be used to either carry forward against future gains or generate a refund against past payments.
I agree it’s a pretty lousy plan - I would much prefer a return to the successful rates of the Obama era - but it’s not helpful to create faulty analysis based on inaccurate interpretations of the proposal.
Not only that, how are you going to pay the tax? In your scenario you can’t sell the stock to pay for it.
The Mysterious Case of the Cash-strapped Billionaire
Wyden’s proposal from 2019 would. We don’t actually know much at all about what this one is.
Also, post 24.