“When you buy something for one price, and later sell it for a higher price, that’s called a “capital gain.” In tax lingo, you “realize” a capital gain when you ultimately sell the asset. If the asset gains in value without you selling it (e.g., a stock you own rises in price), those gains are “unrealized.”
The capital gains tax in the US has a “realization requirement”: You have to actually sell the asset to be taxed. This creates an easy way for rich people to avoid taxes, by simply waiting to sell.
Imagine a 20-something who starts an internet company called FriendCo with his college roommates. Let’s call him Mark. (While I’m obviously basing Mark on somebody real, I’m going to simplify the real numbers a lot to make it easier to follow.)
At FriendCo’s founding in 2004, Mark and his four roommates each took 10 percent of the company, with the other half to be sold to investors. At the start, their shares were worth $0. But their website took off fast and soon had 1 billion users. The company went public in 2012, at a market value of $100 billion. Mark and his roommates’ shares were worth $10 billion each.
At this point, the company stands still and remains worth $100 billion forevermore (I told you I was going to simplify).
If Mark sells all his shares in 2012 after the company goes public, he’d pay taxes on the amount that the shares increased. They were worth $0 at first, and are now worth $10 billion. The top rate on capital gains in the US is 23.8 percent, so he’d pay $2.38 billion in taxes.
Suppose, instead, Mark decides to keep all his shares until he retires 40 years later, in 2052. Assuming the tax code doesn’t change, he’d still pay $2.38 billion. That, right there, is the problem.
Being able to pay a tax bill decades in the future, instead of right now, is a huge benefit. If I told my landlord that I would prefer to pay my rent 40 years from now, she would not find that very amusing. At the very least she would demand that I pay a lot of interest for paying so late. Other big purchases, like houses and cars, usually do involve paying a ton of interest in exchange for later payments. Capital gains taxes don’t.
The “realization requirement” of the capital gains tax thus functions like a massive, zero-interest government loan to people who’ve gained money on their investments. They’re able to save huge sums in taxes merely by waiting to sell their assets, and not paying any interest while they wait.
This is unfair; if you can afford to wait and not sell, you get a big tax break, but if you can’t afford that, you don’t. But the rule can also cause serious economic harm. By pushing people to hold onto investments longer than they normally would, it keeps them from moving their money to newer investments. That makes it harder for startups and other innovative firms to get the money they need to grow, leading to less innovation and slower economic growth.
The problem is compounded by other aspects of the US tax code. If Mark were to never sell his shares and instead pass them along to his children, they would not have to pay capital gains tax on the gain. In fact, if they were to later sell the shares, they would only pay tax on the difference between the value of the shares when they sell, and the value when they inherited them. (This is called “step-up in basis” or, more evocatively, the “angel of death loophole.”) So if the shares remain at $10 billion, the children can sell them and not pay a dime in capital gains tax. The rich are talented at evading the estate tax, too, so it’s very possible that Mark’s fortune will be completely untaxed.”
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“The Biden proposal is meant to make the ultra-rich pay more. The strategy is simple: get rid of the realization rule.
For people with over $100 million in assets, the proposal would put in place a new tax regime. For easily sold assets with clear prices, like stocks and bonds and crypto, gains in value would be taxed during the year they happen, whether or not the assets are actually sold. Taxpayers would be able to get refunds if the assets later fell in value.
Andreessen, Horowitz, and other Silicon Valley types fret about what this would mean for startup founders whose companies haven’t gone public yet. These founders may be billionaires on paper but do not have any actual cash with which to pay taxes.
If these VCs had read the fine print of the plan, they’d see that someone in this situation would not have to pay taxes yet. If more than 80 percent of a person’s net worth is in “illiquid assets” like private company shares, they would not have to pay annual tax on those assets. If they sold the assets, they’d pay the tax plus a “deferral charge,” a kind of interest for paying the tax years after they gained the money. Should the company go public or be acquired, the situation would change — but also the newly minted billionaire would suddenly have liquid assets with which to pay their tax bill.
This is all somewhat academic, though, after the Supreme Court’s June 20 ruling in Moore v. United States. While the decision itself concerned a minor provision in the Trump tax cuts, one justice, Amy Coney Barrett, wrote a concurring opinion arguing that realization is required for a capital gains tax to be constitutional. As my colleague Ian Millhiser notes, Justice Brett Kavanaugh’s majority opinion hinted pretty strongly that he’d side with Barrett on the matter, while deferring on a ruling for now.
If the Barrett view has at least five supporters on the Supreme Court, then the Billionaire Minimum Income Tax is dead in the water.”
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“I do not know of a single honest defense of the angel of death loophole, but unfortunately there are many deeply dishonest defenses. Former Sen. Heidi Heitkamp (D-ND) spent much of 2021 claiming that realization at death would obliterate family farms in the Plains, for which she offered literally zero evidence. Alas, the gambit worked.
In theory, though, a future Congress could still close the loophole. They could go further still and pass law professors Edward Fox and Zachary Liscow’s plan to tax the loans billionaires currently use to generate tax-free cash. The most ambitious option would be to add deferral charges to the capital gains tax, so the rich have to pay the government interest when they defer taxes by not selling their assets.”
“The major proposals pitched by the campaigns of Vice President Kamala Harris and former President Donald Trump would both expand the federal budget deficit—though Trump’s plans would require significantly more borrowing over the next decade.
Trump’s proposals would add an estimated $5.8 trillion to the deficit over the next decade, according to the Penn Wharton Budget Model, a fiscal policy think tank at the University of Pennsylvania (Trump’s alma mater). Most of Trump’s deficit-increasing policies result from proposed changes that would reduce Americans’ tax burden. He’s called for permanently extending the 2017 tax cuts, which would add an estimated $4 trillion to the deficit over the next decade (unless Trump comes up with offsetting spending cuts). His plan to eliminate taxes on Social Security benefits will add another $1.2 trillion.”
“In a recent paper titled “Industrial Headwinds: Reducing the Burden of Regulations on U.S. Manufacturers,” published in the May 2024 Club for Growth Policy Handbook, economist Daniel Ikenson writes, “For manufacturing firms, the cost of federal regulations in 2022 was roughly $350 billion, or 13.5% of the sector’s GDP—a burden 26% greater than the inflation-adjusted cost of regulatory compliance in 2012.”
He adds that while the average U.S. company pays a regulatory compliance price of $13,000 per employee, large manufacturers shoulder a cost more than twice as much—$29,100. However, even some small-sized manufacturers face annual compliance costs of $50,100 per employee. This helps explain why manufacturing automation is so popular and why our fastest-growing companies are in service-sector tech, not manufacturing.”
“A set of new tariffs proposed by former President Donald Trump would cost the average American family an estimated $1,700 annually—and lower-income households would be hit relatively harder, a new analysis warns.
Trump has called for a 10 percent across-the-board tariff on all imports combined with higher tariffs (potentially as high as 60 percent, he’s claimed) aimed specifically at imports from China. Together, those two policies would cost Americans about $500 billion per year, according to the Peterson Institute for International Economics (PIIE), a trade-focused think tank.”
“In a 2019 paper, economists Jeffrey Liebman and Daniel Ramsey ran through the changes the US would have to make to adopt this system of exact-withholding. Under this approach, used by the UK, Japan, and others, “the majority of taxpayers do not need to file tax returns. Instead, these countries use withholding systems in which the correct amount of tax is withheld during the year.”
That could be us — so why isn’t it? They offer four big aspects of the US tax code that prevent it.
The first is the complex system of benefits for families with children. Creating a simple monthly child benefit would solve that.
The second is that capital income like interest and stock capital gains aren’t “taxed at the source”: your broker doesn’t automatically tax, say, 30 percent of the proceeds from selling stock and send it to the IRS. Creating a flat tax on capital imposed at the source would eliminate filing requirements for most people with this kind of income.
Third is the numerous deductions in the tax code. Most of these, like the mortgage interest or charitable deductions, don’t come up much in VITA because it’s almost always more advantageous for clients to claim a standard deduction — but things like the education credits do come up, and removing them would simplify our clients’ lives.
Fourth and most important is eliminating joint returns and moving to individual-based taxation. Joint filing makes precise withholding much more difficult because employers would need to know the earnings of each of their employees’ spouses in order to withhold correctly. If everyone’s taxed as an individual, then eliminating joint filing wouldn’t mean couples would have to file two returns: They’d have to file zero because precise withholding would be possible.”
“Taxpayers fronted nearly $500 million for a new professional football stadium in Minneapolis that opened just seven years ago. Now, they could be on the hook for as much as $280 million more in ongoing maintenance costs over the next decade.”
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“Another reason why these public projects so rarely “pay for themselves” is that cities often grant huge property tax breaks to the stadiums. In New York City, for example, a recent report from the city’s Independent Budget Office found that the four major stadiums in the Big Apple—Barclays Center, Citi Field, Madison Square Garden, and Yankee Stadium—are exempt from roughly $377 million in annual property taxes.
While Madison Square Garden’s situation is weird and unique, the other three stadiums are exempt because they “were all built on publicly owned land that is exempt from property taxes,” according to the IBO report. But there’s nothing actually “public” about a stadium—they’re not parks that anyone can visit whenever they’d like or use for a variety of purposes—and cities should stop engaging in the fiction that they are.”
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“Taxpayers are forced to cover stadium construction costs with the promise of economic growth that doesn’t materialize, then sometimes get hit up for ongoing maintenance costs that can’t be covered by the economic growth that didn’t materialize, and all this happens while the supposedly public stadiums are not generating property tax revenue to help offset their public costs. It’s a bad deal for just about everyone—except for the stadium design firms that get to decide how much extra cash taxpayers will have to pony up to maintain a facility that’s still basically brand new.”
Fiscal Policy – The Economic Lowdown Podcast Series Federal Reserve Bank of St. Louis. https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-21-fiscal-policy How Can Fiscal Policy Help Reduce Inflation? Peter G. Peterson Foundation. 2023 3 7. https://www.pgpf.org/blog/2023/03/how-can-fiscal-policy-help-reduce-inflation US history lesson: Taxes on rich people helped to beat inflation (and
“One of the revelations of the Pandora Papers leaked in 2021 was the proliferation of tax havens inside the US. They’re used not just by wealthy Americans but by foreign politicians, business leaders, and criminals as well. South Dakota in particular has become a destination for the wealthy to stash their riches, and it currently hosts more than $512 billion in trusts, according to the IPS report. The ultrarich have parked trillions of dollars in secretive trusts within US tax haven states.
“It’s not just South Dakota, it’s not just Delaware,” said Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies and one of the authors of the tax haven report. “A bunch of states are in the chase.”
The benefit for states is attracting businesses and jobs, but there’s little evidence that becoming a trust-friendly tax haven boosts job growth for states. Populous states like Texas and Florida are getting in on the game, too. It could accelerate what Collins calls a “race to the bottom,” in which more states change laws to attract the trust industry.
A trust is a contract that stipulates what assets one person wants to pass on to another. When assets are put into a trust, the original wealth-holder technically no longer owns them. A third-party entity, known as a trustee, manages the assets for a named beneficiary until the terms of the trust are fulfilled — for example, a parent establishes a trust for their child that will transfer assets to them when they turn 25 or upon the parent’s death. A trust is supposed to end at some point, and ownership of assets is supposed to pass to the beneficiary; it’s a way station for wealth, not the final destination.
Except that a growing number of trusts don’t end. None of the 13 tax haven states has a strict life span limit on trusts. Several states have abolished a rule limiting the life span of trusts altogether. Others set the limit somewhere between 300 and 1,000 years. By carefully setting up a dynasty trust that lasts generations, a wealthy family can avoid paying inheritance or estate taxes for millennia. These trusts often obfuscate who really owns the assets, so they can continue using them — assets like real estate or yachts — or take out “loans” from the trust without triggering gift taxes. The secrecy and confusing ownership structures of trusts are big problems. The government can’t tax something that legally doesn’t belong to a person anymore, and it certainly can’t tax assets that it doesn’t even know exist.”