Taxing “unrealized capital gains” sounds like a catchy and obscure way to make wealthy people pay more in taxes, but it doesn’t work. A government that moves in this direction ignores the reality that people are not static. The process also involves “taxing wealth” which then becomes an arbitrary definition.
Unrealized capital gains are not income, they are simply increases in value.
If your home was worth $200,000 last year and $300,000 this year, you have an unrealized capital gain of $100k. A 15% tax bill on that value increase means the homeowner would have to pay $15,000 to the IRS.
Joe Biden is proposing to pay for his multi-trillion expansion in debt through this type of tax upon billionaires. Treasury Secretary Janet Yellen admitted this was part of their thinking to help pay for the Biden budget last Sunday. WATCH:
Proposing a tax on money that does not exist is the peak of government. Sure the proposal applies only to billionaires who have massive gains in their stock portfolios, but billionaires are not esoteric titles. Billionaires are people who can, if needed, move their physical location and avoid any U.S. tax on their wealth.
This is the same reason why corporations move the location of their home offices to countries with lower tax rates, a process called corporate inversion.
If Elon Musk, Warren Buffet or any other multi-billionaire wanted to avoid U.S. taxes on their personal wealth they can (relatively easily) change their official residence to Mexico or any other nation where the value of their yet unrealized wealth would not be taxed. That individual inversion process is an easily predictable unintended consequence.
As noted in The Hill:
[…] Biden is suggesting that he will pay for the new spending by taxing people not on what they have earned but what they could earn from selling assets. Most people have assets that increase in value over time. Consider a family home. Over the course of many years, it can easily double in value, but you do not “realize” that money unless you sell it. Biden is suggesting that the government should start taxing you based on any increased value of the things you own, even though you have not actually made that money. It doesn’t matter that the home or stock or art could ultimately go down in value after you are taxed on the higher value. Indeed, if you tax some unrealized gains, you could in extreme cases force people to sell assets like a home to pay the tax on income that they did not make.
The administration has started where few would object: billionaires. (read more)
Additionally, another issue arises if the previously taxed asset goes down in value; an issue where the depreciation or loss becomes a negative tax liability. Meaning if you already paid taxes on an increase in value for an asset, and the following year that asset drops in value, the federal government would then owe you money to recompensate you for a realized loss. If you paid $15k on a $100k increase in the value of an asset, and the following year that asset drops in value by $100k, the $15k you paid would be deducted from the current year tax liability.
There are constitutional issues with the federal government taxing wealth or assets; however, the overarching premise behind every proposal is that all wealth belongs to the government. You hear this ideological perspective when people say “tax expenditures” or spending in the tax code. The idea is that your income is what the government permits you to keep, NOT what your labor has achieved.
The ideology behind taxing “unrealized capital gains” is the same ideology in the premise of “sharing the wealth.” It is an ideology that stems from a belief that your dollar earned comes at the cost of my dollar not achieved.
Beware the voices who would advocate for taxing unrealized gains in wealth as a source of government revenue. Once you start down the path of taxing wealth you set up a process where the U.S. government controls the limits of where that wealth is defined. It will never stop at billionaires….
