Vice President Kamala Harris and her surrogates are pulling out an oldie but goodie in public policy: a tax on unrealized capital gains. Bharat Ramamurti, her campaign economic advisor, defended the proposal on CNBC, telling hosts it is comparable to property taxes and that revenues will be dedicated to proffering “more opportunities” to the American people. While it will not directly impact most Americans, it will potentially trigger a series of unintended consequences for average folks, businesses, and even the US government.
According to The New York Times and The Wall Street Journal, the vice president has endorsed a 25% tax on unrealized capital gains for individuals with more than $100 million in wealth. This would work by mandating affluent households remit taxes on unrealized gains from stocks, bonds, and privately held companies. The average net worth in America is around $1.06 million, and the median net worth is about $193,000 – so most Americans will not be directly affected. However, that doesn’t mean it wouldn’t hit them eventually.
The current administration has floated this idea on Capitol Hill during the budget season over the last few years to help plug the gaping fiscal hole and “address substantial inequities in our tax system.” Each time, it has been panned by a chorus of moderate Democrats, Republican lawmakers, social media personalities, and financial media pundits. A May 2021 study also found that most Americans, including 76% of independent voters, reject this concept.
Revenue forecasts vary, but the consensus is that the wealth tax may generate $50 billion per year for the US government. This would be insufficient to help balance the books and pay the $35 trillion national debt, as it would only make about 60 days’ worth of interest payments. In August alone, the Treasury Department borrowed another $64 billion.
Put simply, an unrealized capital gains tax would be a drop in the bucket of Washington’s drunken sailor mentality.
No, Uncle Sam will not target the Robinhood investing accounts of an armchair trader who owns half a share of Nvidia or Tesla Motors. However, experts warn that if this tax policy is implemented, the crusade will manufacture a ripple effect on the financial markets, impacting many Americans’ 401(k) accounts. The chief reason is that wealthy individuals and hedge funds would likely employ one of three measures: refrain from holding stocks long-term, sell on the first sign of trouble, or avoid deploying capital to help businesses expand and allocate the money to safe-haven instruments.
Let’s say investors choose to keep their positions intact. Paying a tax on unrealized gains made while the money is still tied up in the investment being taxed means taking funds from somewhere else to pay the IRS. What’s worse, a long-term investment could then drop in value in later years, resulting in taxes paid on gains that never materialized.
When the US government introduced the income tax, it only affected 2% of the population. Today, however, two-thirds of US households pay the government a share of their income. More than a century later, why does this matter? It demonstrates how US officials constantly expand their confiscatory pursuits to the broader public. Even if Washington gets its way like a spoiled toddler at the supermarket screeching for candy and imposes the unrealized capital gains tax, revenues will inevitably fall short of rosy outlooks. This would likely prompt politicians and bureaucrats to extend the levy to those making $50 million, then $10 million, then $1 million, and then the Robinhooders.
The Tax Policy, a think tank created by the Urban Institute and the Brookings Institution, has calculated that the Democratic nominee will back approximately $5 trillion in tax hikes on corporations and the wealthy over a decade. If Congress receives that much in revenues and bypasses constitutional challenges, the cash injection would be enough to pay for 39% of the cumulative net interest payments accrued by 2034, based on the recent rosy Congressional Budget Office (CBO) outlook.
Eminent economist Milton Friedman famously wrote, “Governments never learn. Only people learn.” Politicians might fail to understand that America’s fiscal problems emanate from too much spending – discretionary and non-discretionary – and not shrinking tax receipts.
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