“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.”
…
“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.”
…
“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.”
https://www.vox.com/future-perfect/362399/billionaire-minimum-tax-andreessen-biden
“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.”
“Biden isn’t calling his proposal a wealth tax, of course. It’s the “Billionaire Minimum Income Tax,” and it imposes a minimum 20 percent tax on the income of households with more than—oddly—$100 million in wealth. Biden’s proposal is smaller and more pragmatic than the earlier variants from Sens. Bernie Sanders (I–Vt.) and Elizabeth Warren (D–Mass.)—par for the course with Biden. Most notable is that even with implausibly optimistic estimates of the federal government’s ability to collect, the whole mess is supposed to raise an average of a mere $36 billion per year over the next 10 years.
The University of California, Berkeley, economist and Warren adviser Gabriel Zucman estimated what several billionaires would pay under the plan’s 20 percent tax on unrealized gains in illiquid assets, pinning Jeff Bezos’ bill at $35 billion, Warren Buffett’s at $26 billion, and Jim Walton’s at $7 billion.
Anyone who has been paying the slightest bit of attention to federal spending over the last several years knows that figures that begin with b instead of t are now considered rounding errors. The point of this wealth tax is not to raise revenue. It has two rather different aims.
The first is pure political calculus. A floundering, unpopular president seeks to demonstrate a willingness to punish a small, unpopular class of people. A Reuters/Ipsos poll last year found that nearly two-thirds of respondents agree that the very rich should pay more taxes: 64 percent either strongly or somewhat agreed that “the very rich should contribute an extra share of their total wealth each year to support public programs.””
…
“The second aim, which has more far-reaching consequences, is to establish the principle that the U.S. government can tax based on wealth at all. If such a tax were to be put into law—and found constitutional by the Supreme Court, which would be no mean feat—it would be the thin end of a very large wedge. Biden’s proposal will spin up the huge bureaucratic, legal, and accounting support systems, public and private, necessary to support the formal tracking of wealth alongside income.
The utility of permitting individuals to accumulate large amounts of money varies from person to person, of course. There are many billionaires whose fortunes are extractive or confiscatory—that is, they have seized a larger slice of an unchanged pie. But in the U.S. in particular, we specialize in billionaires whose fortunes are clearly related to value creation—that is, they have taken a healthy slice of a pie that they also made much larger.
Sanders and others seem determined to conflate these two groups, applying the term oligarchs to, among others, people whose houses have an excessive number of bathrooms, people who build rockets, and people who own Major League Baseball teams.
People do not need to have been wholly self-made to somehow deserve to keep their money. No billionaire is an island, even if many of them own one. In fact, vanishingly few of us have fates that are wholly self-determined.
As a moral matter, if not a legal one, we might ask what the very rich do with their money as a way of evaluating whether they should keep it. As famously rich person Elon Musk recently tweeted: “Working hard to make useful products & services for your fellow humans is deeply morally good.” Many who support wealth taxes seem to hold the belief that the government would use the resources that the very wealthy command toward more valuable ends. Of course, most of the fortunes of billionaires such as the Waltons, or Musk, or Bezos are tied up in the large and extremely productive firms that made them rich in the first place.”
https://www.marketwatch.com/story/the-race-to-the-bottom-on-corporate-taxation-starves-us-of-the-resources-we-need-to-solve-our-biggest-problems-2019-10-07
“In the February issue of the American Economic Review, researchers Kamila Sommer and Paul Sullivan consider the implications for the US housing market if this $90 billion subsidy to homeowners were to be scrapped. They find that getting rid of it would actually improve overall welfare by lowering home prices and expanding opportunities for home ownership among younger and lower-income households.
“The people who are the primary beneficiaries of the deduction are the high-income households,” Sommer said in an interview with the AEA. “When you take it away, house prices fall, they consume less housing, live in smaller houses…but the decline in house prices reduces the entry cost for the marginal households that are previously renting. It’s almost like this reallocation of housing from high-income households to low-income households.”
Critics say the mortgage interest deduction is a regressive tax policy that inflates prices and encourages buyers to choose more expensive houses and take on debt rather than sinking money into other investments. It also robs the Treasury of tax revenue that could be used to close the deficit. But real estate lobbyists say its repeal would depress homeownership and negatively impact social welfare.”
…
“More than half of all existing homeowners — 58 percent — would see their consumption improve after the reform, with most of the benefits going to young, low-income households. Rich homeowners with big properties suffer the most, since they have outsized amounts of mortgage interest that can be deducted from their income tax burden. When that benefit goes away they end up bearing the brunt of the impact.
It’s less certain whether there would be any meaningful impact on tax revenue for the government, the authors say. Getting rid of the deduction leads to a 2.6 percent increase in income tax revenue, but the falling home prices translate to a 7.8 percent drop in property tax revenue. Overall, it’s essentially a wash, with a total revenue gain of just one-half of a percentage point.”