I agree. Taxing unrealized capital gains is just not a good idea at all. What's more problematic than people having huge sums of unrealized book value, is that in the current system they're allowed to live a lavish lifestyle by taking out loans against those assets (which effectively is an income for them) without paying any taxes at all. That is what should be taxed in some form.
I agree that taxing unrealized capital gains is a fundamentally flawed approach. However, the problem with the current system is that these ultra-wealthy people just end up borrowing against their equity, avoiding selling if possible.
I think it would make sense to count borrowing against equity as tax-wise equivalent to selling that same equity.
With that loophole closed, together with raising the capital gains tax, I think the tax system would be much more in line with what people expect from it.
Taxing someone based on their unrealized gains only makes sense if you have liquidity! Instead of making the tax system more complicated with propositions like this, we should just switch to a consumption based tax system.
Yes, taxing unrealized gains as if they were income would be silly.
Most proposals to tax giant piles of wealth in the market look nothing like what you've described. A wealth tax is more like: pay 1% per year on the current market value of your portfolio, if that amount is over $100 million.
Money attracts money. Wealth taxes are an attempt for reverse that effect and force some of that money to trickle down.
That said, any attempt to implement a wealth tax will probably be struck down as unconstitutional because moneyed interests want it to be declared so.
There's a more general proposal to tax unrealized capital gains, for the wealthy. It came up in funding negotiations for this bill but wasn't ever in a draft IIRC.
The issue is when the ultra-wealthy take out loans against their investment assets (and thus, those unrealized capital gains).
By doing that, ultra-wealthy _are_ realizing the value of their investments without being taxed. That's how this wealth is being accessed, and that's a large component of what drives these ultra-low tax rates for the ultra-wealthy.
I think you're correct in how you're characterizing the general consensus around wealth tax - that people should be taxed based on all accumulated wealth, including unrealized gains. I don't know how practical that is. I think an approach that frames it as 100% capital gains and/or marginal income tax rate on equivalent to the first 2-3% of your total gross wealth is more workable.
I'm all for high taxes for the rich but this particular scheme is fairly unlikely to generate that much additional tax revenue and I think it's even possible that this will reduce tax revenue. Because income in the form of unrealized capital gains is not taxable at all and corporate tax rates are going to be much lower than 70%, it will certainly cause people to shift personal income into one of these forms. Income tax beyond a certain point is almost always going to be regressive because of the fixed costs involved in converting one type of income to another. A much better approach is making taxes relatively flat and spending more progressive - this is basically how it works in Europe.
Wealth taxes are a not the best idea. Being taxed on something illiquid that can’t generate cash flow is the pinnacle of dumb taxation. For example, you have a piece of art. You’d have to sell something just to hold onto the art, and if you don’t have anything to sell, you’d have to sell the art itself just to pay for ownership of the art. It would make some sense to increase capital gains taxes instead of slapping people with a wealth tax. I say this as someone that would not be hit by a wealth tax.
Also, the rich can simply move assets out of the country, and then you erode the very thing you want to tax.
But you're still discussing unrealized gains/losses, when I'm suggesting to ignore them. If someone is borrowing millions, hundreds of millions, or even billions against untaxed collateral, then they should be taxed on what they borrow, limited to how much they can borrow, and/or taxed more on what they buy. It's their and the bank's problem if they're borrowing against unrealized gains or losses.
The wealth inequality problem in the U.S. is INSANE. If the U.S. had a population of just 10,000,000, literally 12 people would have as much wealth as the bottom 60%, i.e., 6,000,000 people, combined. And yet, here we are talking about how "impossible" it is to simply tax wealthy people.
These systems were made by humans. They can be fixed. Wealth inequality and taxation of the wealthy are not laws of nature that can't be changed.
The problem of the rich not paying taxes because they're stock-rich and use the stock as collateral to take out loans to buy a new yacht could be solved by taxing unrealized gains.
Of course, this tax increase could be offset by also allowing unrealized losses to act as a tax deduction.
But this is kind of my point. Capital gains tax is a dumb tax, it mostly screws middle class people and creates several perverse incentives, and we'd be better off to use a simple consumption tax instead. The argument against this is supposedly that "rich people" are the ones who pay capital gains tax, but in practice "rich people" are the ones in the best position to avoid paying it using fancy accountants and cross-border shenanigans. The middle class people actually paying it wouldn't be any worse off with a consumption tax that lacks all of those perverse incentives, and might even end up paying less because then the super rich would pay the same rate as they do instead of a lower one.
Exactly. The way I see it, if someone has a large pool of wealth, then they have already been taxed when they earned it. Taxing capital gains is double-dipping.
Furthermore, I don't see how we can justify having a very low interest rate set by the federal reserve in the interest of encouraging investment, but then decide to tax capital gains more which would discourage investment. However, trying to make any sense of our tax system is probably not a fruitful endeavor :)
"... minimum 20% tax rate that would hit both the income and unrealized capital gains of U.S. households..."
a tax on unrealized capital gains of any kind is idiotic; literally taxing imaginary wealth. The "unintended consequences" of such a law would be a disaster, in two ways:
1. as intended, by focusing on 'billionaires', the tax will force mass liquidation events on young volatile companies, wiping out the very wealth the law sought to tax (and not just the billionaires' wealth, either)
2. as not intended, assuming the notion of taxing unrealized capital gains (i.e. theoretical gains on paper, not actual income) survives logical and legal challenges, when the "only on billionaires" part gets dropped and "also on your house's market value" comes into play.
The first income tax was a tiny percentage on millionaires. It didn't stay that way, neither would this.
Didn’t say wealth tax, just tax. Taxing unrealized gains would be dumb.
It’s pretty easy, hit dividends, income for social security and Medicare purposes without caps, etc. Eliminate deductions for margin interest, tax filing, legal, other fees. Put an excise tax on LLC formation and annual reporting, and require an annual filing of beneficial owners of corporate entities. Charge a higher fee for foreign and corporate owners.
"But if you have enough money, current rates mean that taxes & inflation will erode your capital slower than the interest you'll earn from that capital alone, and so money is inevitably growing on itself."
If it were based on interest, this is unlikely to be a problem unless interests rated exceeded tax rates.
The real issue is that most of the net worth is equity. These unrealized gains are not taxed. In some cases, a lot of the value is driven by speculation and not actually tied to the current profits of the company. This is why wealth taxes are brought up, or at least changes to capital gains taxes.
"As a society, we should prevent "escape capital" to be a thing."
This assumes that the ultrawealthy do not serve a purpose. Yeah, taxes should be increased on the top end, but probably not to the point of completwly eliminating the ultrawealthy. These people tend to use thier capital to fund other ventures. This can be important to startups and other organizations. Oftentimes they donate large amounts of money to charities or start charities in areas the government has neglected. There are alternatives to these, but I'm not convinced they are actually better. I think we just need to tweak capital gains tax on the ultrawealthy.
That's basically a recipe for rich people never payping tax again. They pretty much do this already. It's called "buy, borrow, die" [1]. Basically, you borrow money against assets and spend that instead of realizing a profit or gain and being taxed on it. You basically never pay off those loans.
Also, this claim is factually untrue. We tax property based on unrealized gains all the time. There's absolutely no reason why we couldn't do this with other assets.
I'm all for higher taxes on capital, maybe with some exceptions on the amount of capital gains tax to pay on your first €10m. But honestly, a wealth tax is just demotivating. Not every wealthy person invests their new found riches. It makes sense only to tax gains from investments, but only gains. Not making money on your capital? No problem, you don't pay. If you are, you do pay extra tax. I don't even think it's a bad idea to group income and capital gains together, as long as you can offset losses from capital against taxes on income.
Second point against a pure wealth tax: some of that wealth might be tied up in very illiquid assets (say, a castle worth €20m), meaning you might not be able to keep them because you have to pay the annual wealth tax. Or in say, art, which can be highly volatile in its valuation. This will automatically lead to disputes with tax authorities about valuations, etc etc. Not exactly fun to deal with + it's hard to enforce/verify
The correct solution to this problem is to abolish the distinction between capital gains and ordinary income (ie wages), and abolish the corporate income tax that justifies the "double taxation" argument that justifies the capital gains rate.
Capital gains is why Mitt Romney can make 200 times as much as I do in a year, and pay half my effective tax rate. This is broad across the economy. It's a fundamentally immoral tax model. Moreover, it's a socially dangerous one - the idea that there is one set of rules for the rich and another for everyone else is already stressing our nation. Stop actually proving the point, lest you want a revolution to deal with it when society lacks the nerve.
Corporate income tax is no big loss. For one thing, it's an increasingly shrinking part of our tax base. For another, it's riddled with loopholes and borderline graft, much more so than individual taxes. This kind of stuff is biased against entrepreneurship, in favor of cozy relationships with politicians. Being connected is more important than being hardworking or imaginative.
Tax capital gains as ordinary income. It's simple and fair.
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