You have read about plans to tax unrealized capital gains and the sketchy legal ground those plans stand on. Now Kamala Harris’s campaign has confirmed she’s onboard with plans to tax gains on assets Americans haven’t even sold. Adam N. Michel explains at the Cato Institute:
The Harris plan includes a new minimum tax of 25 percent on traditional income and unrealized capital gains for taxpayers with more than $100 million in total wealth. While ostensibly limited by a high net-worth threshold, such a tax would be economically destructive and administratively unworkable—not to mention unconstitutional.
What’s wrong with taxing unrealized gains? The core problem with taxing unrealized gains is that there is not actually anything to tax until the asset is sold for a profit. For example, if I purchase a house for $400,000 and it appreciates by $50,000 the following year—an unrealized gains tax at 25 percent would mean I owe the government $12,500, regardless of whether I sell the house or have the cash on hand to pay the bill.
If you don’t have the cash, such a system would force you to sell your home or take out a loan to pay the government. Levying a tax on someone’s projected future income before they have full claim to it themselves also raises deeper questions about individual property rights, financial privacy, and due process.
The pursuit of taxes on unrealized gains turns on a core disagreement about what constitutes “income.” Cato’s Chris Edwards recently noted, “Unrealized capital gains are not a component of any of 11 different measures of income currently used by various federal agencies, and unrealized gains have been excluded from income since the first modern income tax law of 1913.” However, some liberal tax scholars have long sought to define income as an individual’s annual change in net worth—a measure that includes wages plus any increase or decrease in the value of assets. Thus, an unrealized capital gains tax, often also called a mark-to-market tax, uses a better approximation of these liberal economist’s preferred tax base, which is biased against saving and investment.
Taxing unrealized gains raises effective tax rates on US savers by making them pre-pay their taxes on gains not yet realized. An unrealized gains tax paid annually out of cash on hand increases taxes paid by more than 12 percent.[1] Such a tax increase on investment returns would disincentivize entrepreneurship, new business start-ups, angel investing, and overall investment in leading-edge industries. The new tax would also disadvantage domestic investors relative to similarly situated foreign investors not subject to the tax.
Action Line: The current plan for unrealized gains taxation would only affect the very wealthy, but that’s how the income tax began. These sorts of things have a way of expanding their breadth over time. Click here to subscribe to my free monthly Survive & Thrive letter.
