As current Vice President Kamala Harris has gotten her campaign underway, she made her policy stances more clear. I have already criticized a few of them, including excluding tips from taxation, price controls on groceries, a corporate tax hike, and down-payment assistance for first-time house-buyers. From the looks of it, the Harris campaign is embracing the tax hike proposals from Biden's 2025 budget, including a minimum tax on unrealized capital gains.
As Investopedia brings up, an unrealized capital gain is a theoretical profit that exists on paper, but has not been actualized because the investment has yet to be sold for cash. The unrealized gain does not affect taxation because the investment has not been sold. Once sold, the gain is realized. Harris would like for those with a net wealth above $100 million to pay a minimum tax on their unrealized capital gains on such assets as stocks, bonds, and privately held companies. While lower than Biden's proposed 39.6 percent, Harris is still proposing a 25 percent on unrealized gains.
The bipartisan Committee for a Responsible Federal Budget (CRFB) estimates that this tax would bring in $500 billion over the next decade. Even if that is accurate, the minimum tax would be an unstable source of revenue. As the Right-leaning Tax Foundation points out, much of the revenue in the first decade is from taxing previously accumulated tax gains. Afterwards, the revenue moving forward will be smaller. Plus, stock market and macroeconomic performance will make the tax collection more volatile.
Another aspect of the unintended consequences would be that this tax would add burden onto taxpayers while complicating administrative burden. Why? To comply, the taxpayer would have to calculate to see if their net wealth exceeds $100 million. They would then have to calculate their effective tax rate. If it is below 25 percent, they would have to pay additional to make sure their effective tax rate is 25 percent. See the Tax Foundation's chart below to see how complicated this calculation can get. If she were going to be consistent, Harris would implement a tax refund for unrealized losses, which would create even more complications.
This additional compliance would not only affect those with net wealth over $100 million because those with net wealth below, but closer to, $100 million would also have to file to show that they would not owe the IRS on the unrealized capital gains tax. To quote the Tax Foundation, "Changing the definition of taxable income to include unrealized capital gains presents significant administrative challenges, including how to value non-tradable assets and how to treat illiquid taxpayers who may have paper gains but lack cash on hand to pay their minimum tax bill."
Not only does this create a greater compliance burden for taxpayers, but the already-overwhelmed Internal Revenue Service (IRS) would have to create a new wealth reporting system to make sure that taxpayers are in compliance. Not only would such a reporting system mean increased government surveillance and intrusion into private affairs. As I brought up when I was criticizing the wealth tax, measuring the value of wealth is more complicated than with income.
The valuation will be even more complicated to determine since the assets have not been realized (sold). Until there is an actual transaction, the valuation is more subjective and the compliance more onerous, which means taxing unrealized gains would be more open to interpretation and ultimately government abuse because the government would have greater control over assets. This would explain why European countries wait to tax capital gains until the gains are realized, and also why the United States has taxed capital gains when the gains are realized. Not only is it unfair to tax on paper gains that may never materialize. As prominent Left-leaning economists recognize (Piketty and Saez, 2022), "No income tax system to date has been able to tax the full return on wealth, including unrealized capital gains."
Another reality is that this would increase tax burden on U.S. savers and reduce the savings rate in this country. In the long-run, this would reduce American incomes because the investment returns would flow to foreign savers instead of U.S. savers. This would also likely disincentivize angel investing, entrepreneurship, and risk-taking, all of which would result in less economic dynamism. After all, start-ups and small businesses rely on investments from individuals willing to take risks in the hopes that their investment pays off in the long-run. One research paper modeling the effects estimates how a tax on unrealized capital gains could lower the GDP, purchasing power, and investment while reducing jobs by 300,000 individuals (Kumar, 2023).
And if you think this tax would only hit the wealthiest in the long-run, think again. This would set a dangerous precedent for more deleterious taxation in the future. Here are some examples from U.S. taxation history of how taxes on the rich eventually hit us all. In 1898, the government passed an excise tax on telephones. It only affected the rich then because only the wealthiest had phones in 1898. Once the phone became commonplace, everyone paid the 3 percent tax on long-distance phone service until the tax was discontinued in 2006.
A bigger example is the federal income tax. When it first was enacted in 1913, it was only 7 percent and fell on those making a half million or more [in 1913 dollars]. What started off as "soaking the rich" eventually soaked the everyday American. We can thank Franklin Roosevelt for expanding the income tax base, which is one reason in a long list of reasons I do not like him. A similar phenomenon happened with the Alternative Minimum Tax and the inheritance tax.
If you give the government an inch, it will take a mile. Senator Wyden (D-OR) already proposed an unrealized capital gains tax for those with a net wealth as low as $10 million. Although not inevitable, it would not be at all surprising given precedent if an unrealized capital gains tax would eventually make its way down to the upper-middle class or even middle class.
To recap, this unrealized capital gains tax would create a complicated tax regime, new compliance costs, disincentivize savings and investments, create more difficult administrative challenges for the IRS while giving them more access to private affairs, and create a minimal amount of government revenue. It does not take all that much foresight to see how much this untested idea would harm the economy. If Harris cared about creating economic opportunity for all, she would remove the government barriers of spending, taxes, and regulations to make it work. Unfortunately, all her economic plan indicates is using heavy-handed government to make the lives of Americans more difficult.
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