BIDEN’S LATEST TAX-THE-RICH SCHEME UNWORKABLE, POSSIBLY UNCONSTITUTIONAL
The Biden administration’s idea to tax billionaires’ unrealized capital gains may sound good to the tax-therich crowd. In practice, it would be an unworkable and arguably unconstitutional mess that could harm everyone.
In theory, the idea is seductively simple and appealing. Billionaires and the super-rich possess massive amounts of wealth in the form of stocks, businesses and frivolous baubles such as famous paintings or yachts. These assets appreciate in value, but their owners pay no tax on that value unless they sell it — or “realize the gain,” as tax lawyers put it. Only by selling the asset would a person be able to convert the asset into taxable income. This means billionaires with appreciating assets can become hundreds of billions of dollars wealthier each year, but the government gets nothing.
That would change, however, under a proposal that Democrats are considering that would tax unrealized gains each year as if the underlying asset had been sold. Forbes estimates that Tesla founder Elon Musk’s net worth rose by $126 billion last year as his company’s stock price soared, but he surely paid almost no tax on that because he never sold the stock. President Joe Biden’s plan would tax all of that rise. Do the same for all the nation’s billionaires, and the feds could pull in loads of cash.
If that sounds too good to be true, it’s because it is. To start, not all assets are as easy to value as publicly traded stocks. Privately held companies and rare but valuable items are difficult to fix with an annual price. But billionaires are precisely the people with the motive and the means to hire the best tax lawyers to fight the Internal Revenue Service at every step of the way, surely subjecting each tax return to excruciatingly long and expensive audits.
Then there’s the question of what to do with capital losses. Expensive assets can go down in value, too, and billionaires would rightly insist the IRS account for those reversals of fortune. Would the IRS have to issue multi-billion dollar refund checks to return the billionaires’ quarterly estimated tax payments from earlier in the year? No president will want to be in charge when their IRS has to give billions of dollars back to Warren Buffett or Bill Gates.
The Constitution may not even permit taxation of unrealized gains. The 16th Amendment authorizes taxation of “income,” and the definition of that seemingly simple word has spawned a long history of complicated case law. Whether something is defined as income often has to do with whether a person has complete control over a source of money that can then be used in trade to purchase or invest as one sees fit. Unrealized gains don’t fit under that rubric because the wealth
is on paper, not in the hands of the owner to use as she wants. In 1920, the Supreme Court ruled that stock dividends or splits can’t be taxed because they are not income. That is just one example that the Supreme Court would inevitably have to consider to determine if Congress even has the power to tax unrealized gains.
If Congress does have that power, however, it will only be a matter of time before lawmakers apply the tax to ordinary Americans. Anyone who owns a house or has a retirement account has unrealized capital gains. Billionaires get all the attention, but the real money is in the hands of the broader public, as the collective value of real estate and mutual funds dwarfs what the nation’s uber-wealthy hold. The government would love to get 25% of your 401(k)’s annual rise, and our nation’s massive annual deficits and cumulative debt mean it will need that money sooner rather than later.
Taxing unrealized capital gains will unlock a Pandora’s box of problems. Better to keep them under lock and key.