In the final stages of the presidential campaign, the gap between left and right has become starker over whether the federal government should impose a generalized tax that reaches the unrealized appreciation of various assets. When the idea first surfaced in 2022, President Joe Biden defended his package on the ground that it “eliminates the inefficient sheltering of income for decades or generations.” But he never explains why the deferment of the tax on unrealized appreciation of capital assets, which has been a fixture of the tax code since the epochal case of Eisner v. Macomber (1920), is suddenly “inefficient.” Instead, he praised his initiative because it targets only the top one-hundredth of 1 percent of the population. “The billionaire minimum tax is fair, and it raises $360 billion that can be used to lower costs for families and cut the deficit.”
In the heat of the election, Biden has found a willing ally in Kamala Harris—to the manifest irritation of one of her billionaire supporters, Mark Cuban, who denounced the program as an “economy killer.” Cuban is right, and Harris wrong. It is pretty clear that Biden’s notion of fairness targets some heavy hitters. According to ProPublica, the years between 2014 and 2018 were kind to three titans of American business: Elon Musk, Jeff Bezos, and Warren Buffett. Together, they amassed the tidy sum of over $137 billion via the appreciation of their assets. The kicker is that under the current legal regime only $5.7 billion of those assets were subject to taxation. By contrast, the entire amount of unrealized appreciation would be subject to the newfangled Biden/Harris “billionaire minimum tax” that first singles out those households worth $100 million—not an easy job to do when there are illiquid assets, often subject to joint ownership, or located in various legal vehicles, or both—as a source of public revenue. Then it lowers the boom.
The total gain would now be subject to a minimum 25 percent tax, the lion’s share of which would be imposed on the unrealized appreciation of all classes of capital assets. Then, just to top it off, the Biden/Harris proposal adds another twist which imposes (but only for the wealthiest) the income tax on all unrealized appreciation at death, just at the time that the heavy estate tax, which grants a $13.9 million per person exemption (a lot to the rest of us but chump change to these billionaires) kicks in. So, after creating eleven tax brackets for the first $1 million of the taxable estate, the plan imposes a weighty 40 percent tax on all wealth above that level.
This entire exercise of upping taxation on the super-rich is a sad illustration of upside-down thinking, for the last thing that should be done is to tax unrealized appreciation. Those dollars do not sit idle when they are kept within corporations or partnerships. They are put to work so that they generate more useful goods and services that increase the well-being of the public at large. And the best thing about the decision not to tax unrealized appreciation is that these investments are in the hands of people who actually know what they are doing. The same cannot be said of how the government is likely to use the extra tax revenues. The first prediction is that the new programs will not result in reduced taxes for lower-income individuals, because the most likely outcome is that those expenditures will be spent on some other project.
One popular cause today is to use these revenues to respond to the so-called climate emergency, a topic which should be subjected to rational debate. Yet too often the climate narrative becomes a guise to fix some ostensible deep-seated rot of American capitalism. As Judge Glock reports in the Wall Street Journal, the $5 billion allotment under the 2021 Bipartisan Infrastructure Law to build out a nationwide system of electric-vehicle charging ports has been a flop because the Biden/Harris administration requires all grantees to use union labor and target 40 percent of the work in disadvantaged communities, and lots more. The consequences of the mismanagement are not confined to charging stations but throw off the whole green effort to switch away from fossil fuels. The government would have done far better to put the project out to bid, where the intended targets of the Biden/Harris tax assault could do the work.
These government failures should also lead to an earnest public reconsideration of the persuasive arguments for a consumption tax, one that focuses on how much (or little) an individual drains from the economy, while the income tax focuses on how much one earns, regardless of how that wealth is disposed. Money that is reinvested is insulated from all taxes, so that it can immediately be put to productive use. Accordingly, it is no longer necessary to decide whether the gains when realized were derived from the appreciation of capital assets or from services. Thus, there is no need to have a differential rate base for different kinds of assets. And taken to its logical conclusion, there should never be any tax at death at all because the passage of wealth from one generation to the next does not result in any consumption.
To be sure, the smaller taxable base under a consumption tax might well entail higher tax rates. Yet the greater amount of wealth generated to fund future consumption should help offset that basis. A consumption tax could be made progressive to parallel the current income tax, but as a longtime defender of a flat tax on income, I believe that the same flat approach should be adopted with consumption taxes. The outraged response will be that it would reduce the elusive “fair share” of wealth from the rich, to which the answer is, it would increase their contribution to overall wealth even more.
Transitions in taxation—including the new Biden/Harris proposal—are always difficult to execute, so often the best strategy is to take intermediate steps that move toward the desired result. Thus, exempting unrealized appreciation from taxation should be regarded as a sensible halfway house to the superior consumption tax. So long as these gains are not taxed. we have a split regime: an income tax for realized appreciation and a consumption tax that does not reach unappreciated capital gains. Unrealized appreciation is not a form of income. The early decision in Eisner followed that result for good reason. Eisner involved a pro rata stock dividend by a three-to-two split of common stock, which added a third stock certificate to every two owned. There, the court held that the taxpayer had “not realized or received any income” despite the “the antecedent accumulation of profits evidenced” by the dividend.
Switch to the proposed rule that taxes the unrealized gains of these assets and lo, pandemonium follows. No one can pay the government with corporate stock, so millions of taxpayers at the same time will have to decide whether to mortgage their shares or other assets to pay the tax, or to sell the shares or assets to realize gain. That frenzied activity will churn markets such that no one will know just how these estates should be valued. The privilege of tax deferment helps for one period only, given that it metastasizes into a cumulative burden if done year over year. And matters get worse when both liquidity and valuation matters arise for artworks, intangible rights, and claims in unsettled lawsuits, family corporations, and the like, where there is no ready market. And there is the real risk that the government will have to offset the tax liabilities imposed in one year with deductions for unrealized depreciation in future years or offer refunds for the taxes paid in past years. As matters now stand, evaluation of these assets under the current estate-tax regime can take years, and the same painful process will be true for these high-income taxpayers, so that at the start of a new year, they will have no idea of their carryover liabilities from previous years.
Moreover, since by design this new tax is not a wealth tax, paying a large tax in year one will reduce the potential gains for taxation in all future years, so that the government income from this source is likely to be unstable over time.
The losses, of course, will not be confined to the parties subject to the tax, but to everyone who does business with them, for a reduction in capital investment will lead to reduction in the value of shares and wages for everyone else. Recall that the tax reductions under the 2017 Tax and Jobs Act lived up to their optimistic predictions because the act understands that wages and investments rise together or fall together. The confrontational attitude that both Biden and Harris take toward economics is that workers will get their just rewards only if our most successful citizens pay for, as it were, the sins of their own success.
It is all folly. The basic structure of the Internal Revenue Code—special deals to one side—does well in figuring out whom to tax and when to tax them. If there can be no move to a consumption tax, then by all means keep the stability of the status quo, both before and after the next election.
