Kamala Harris’s proposal to tax wealthy people’s unrealized capital gains is a bad idea, but not for the reasons claimed on social media.
First, definitions. I’ll use an illustration. Let’s say you buy 100 shares of Stock A for $60 a share and sell it for $75 a share. Your profit of $15 a share, or $1,500 total, is a realized gain. But if you don’t sell it, and only have a gain on paper, that’s an unrealized gain.
In other words, Harris’s proposal would tax owned assets that have gone up in value but haven’t been sold. Homeowners are familiar with this type of tax; it’s very similar to the property taxes on your home.
But Harris’s “billionaire tax” would only apply to taxpayers with a net worth over $100 million. That’s probably considerably fewer than 20,000 Americans, and that’s where the lying starts. Social media critics assume everyone would be taxed, and say things like “people will lose their homes,” which isn’t true.
In 2021, only 5 homes fetched more than $100 million in the real estate market, according to Robb Report, if you don’t count two sprawling ranches (see story here). There aren’t a whole lot of homes worth that amount, and all are owned by ultra-rich people.
CNN says, “A billionaire minimum tax is one of several proposals pushed by Democrats in recent years to tax the rich.” They’re throwing spaghetti at walls to see if anything sticks (i.e., is supported by the public).
Harris (and Biden too) argue the “wealthiest Americans [should] pay their fair share,” and she proposes using the revenue it generates “to pay for social spending programs, like helping families pay for child care or down-payment help for first-time homebuyers” (see story here).
I see three major objections to this scheme: Valuation, feasibility, and spending priorities. I’ll take them in order.
1. Valuation. For non-cash assets like real estate, businesses, artworks, and financial investments like stocks and bonds, there’s simply no way to know what they’re worth in dollars except by selling them. They’re worth what a willing buyer will pay for them, and if there’s no buyer, they’re worth nothing. The only way to find out if there’s a buyer is by offering them for sale. In addition, their value fluctuates by the day, hour, and minute, so how do you put a dollar value on them? Thus, any valuation method necessarily will be highly arbitrary, and potentially unfair.
2. Feasibility. Administering such a tax scheme would be a nightmare. Wealthy taxpayers would have to list all their assets in tax filings, and the IRS would need a system for keeping track of them. This is complicated by constant asset turnover. Taxpayers and the IRS would have to calculate changes in value for each asset every year; it’s hard enough to do for assets sold during a tax year, but do it for every asset would make it much harder.
3. Spending. For this scheme, Democrats deserve the “tax and spend” epithet. They want to raise taxes (“soak the rich”) so they can spend more on social programs. The federal budget is running trillion-dollar deficits, piling up debt, and facing shortfalls in basic programs like Social Security and Medicare. Economists disagree on the urgency of deficit reduction, but there’s plenty of evidence that deficits aren’t free money; they impact inflation and financial markets. At least the Democrats are trying fund more social spending with taxes instead of printing more money, but that’s faint praise indeed.
If they want to spend more money by taking it from rich people, there’s an easier way to do it: Close the tax loopholes that allow billionaires to shelter their income from taxes. Of course, if Democrats could get this through Congress, they would do it; they can’t. What makes them think a byzantine new tax scheme would be easier to pass?
I think the reality is this is just campaign talk, and even if Democrats win the White House and Congress, it will be quietly dropped after the election. But the real issues of deficits, spending priorities, debt interest, funding Social Security and Medicare, and other pressing social needs won’t go away. Democrats need to think about how to realistically tackle these issues, in the event voters entrust them with solving them.
Meanwhile, the last place you or I should gather our own thoughts about taxes, spending, and federal programs is on social media. Anybody can post anything on social media, no matter how factually untrue and intellectually dishonest, as social media posts about Harris’s “billionaire tax” proposal demonstrate.