No folks, Harris doesn’t plan to tax your unrealized capital gains — but a wealth tax is still a good idea

That fetid gust of hot air you may have detected wafting from Republican and conservative social media posts over the last day or two was a made-up claim that Kamala Harris is plotting to tax everyone’s unrealized capital gains if she becomes president.

This would be a departure from current law, which taxes capital gains only when the underlying assets are sold or “realized”.

That it’s a mythical charge hasn’t stopped right-wing members and GOP officials from agonizing over the economic implications of any such change and the allegedly horrific impact on ordinary Americans.

Thomas Jefferson

Here’s, for example, far-right Mike Cernovich, in a Tuesday tweet at X: “If you own a house, deduct from the Zillow estimate what you paid for it. Be prepared to pay 25% of this in a check to the IRS is your unrealized capital gains owed as suggested by Kamala Harris.

And Chicago venture capitalist Robert Nelson: “Taxing unrealized gains is truly the craziest, economy-destroying, innovation-killing, market-crashing, pension-fund-decimation, unconstitutional idea that was probably planted by Russia or China to destroy the economy. Demans must flee. away from this extremely stupid idea.”

Okay guys, take a deep breath. Harris did not propose to tax your unrealized capital gains or mine. What she said, as the Harris campaign told me, is that she “supports those raising revenue in the (administration) Biden-Harris FY25 budget. Nothing but that.”

So what’s in that Biden-Harris administration budget for fiscal year 2025?

The budget plan does indeed call for taxing unrealized capital gains held by the country’s uber-wealthy. This is part of his proposal for a minimum tax of 25% on the annual income of taxpayers with more than $100 million in wealth – a wealth tax. If you’re a member of that cohort, lucky you. But at that level of welfare you have no reason to complain about paying a minimum of 25% of your annual income.

However, there aren’t very many of you “centi-millionaires,” as the category is known—10,660 in the U.S., according to an estimate in 2023. That includes a few centi-billionaires like Elon Musk ($249 billion, according to Forbes), Jeff Bezos ($198 .5 billion dollars) and Mark Zuckerberg ($185.3 billion). It’s doubtful that anyone in this category looks carefully at Zillow estimates to calculate the sale value of their home (or homes).

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Several other proposals in the budget plan are relevant to taxes on the wealthy. One would restore the top income tax rate of 39.6 percent, which was cut to 37 percent in the Republicans’ Tax Cuts and Jobs Act of 2017; Biden proposed allowing that cut to expire as scheduled next year. The restored top rate would apply to income above $731,200 for couples, $609,350 for singles, starting with this year’s income.

Another provision would raise the tax rate on capital gains and dividends to the same rate applied to ordinary income — but only on annual income exceeding $1 million for couples ($500,000 for single filers). Under current law, capital gains and dividends get a huge discount: the top rate is 20%, though it’s zero for couples earning $89,250 or less ($44,625 for singles) and 15% for those earning more higher than that but less than $553,850 ($492,300 for singles).

Preferential rates on cap earnings “disproportionately benefit high-income taxpayers and give many high-income taxpayers a lower tax rate than many low- and middle-income taxpayers,” the White House explains. They also “disproportionately benefit white taxpayers, who receive the overwhelming majority of the benefits of reduced rates.”

The proposal would also eliminate the notorious step-up that heirs enjoy. Currently, if those inheriting stocks, bonds, real estate or other capital assets sell those assets, they are taxed only on the difference between their value at the time of the original owner’s death and their value at the subsequent sale – not the difference between their cost when they were bought (“basis”) and their value when they were finally sold.

This process turns the capital gains tax into what the late USC tax expert Ed Kleinbard called America’s only voluntary tax. Because owners of capital assets do not pay tax on their appreciation in value until they are sold, they can defer tax indefinitely by simply not selling. When they die, the step-up in basis extinguishes the previous capital gains liability forever, leaving only a gains tax for the step-up heirs starting on the date of their inheritance.

And wealthy families can enjoy the benefits of their equity portfolio by borrowing against it, without ever having to sell. This is an option rarely available to regular taxpayers who may have to sell to make ends meet. This is how those families perpetuate their wealth without paying their fair share of income tax.

The Biden plan would reverse the step-up for heirs by charging the capital gains tax on the bequeathed property, calculated from the original purchase and collected in the decedent’s estate. Inheritances by spouses would be exempt, and the existing exemption of $250,000 in earnings per person on the transfer of a principal residence would remain in place.

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Biden’s plan would also raise the net investment income tax and Medicare tax rates to 5 percent each, from the current 3.8 percent on incomes over $400,000. This would bring the maximum capital gains rate to 44.6%.

Is it a lot? Too much? Isn’t that enough? It is true that capital gains tax has typically been lower than ordinary income tax, reaching as high as 40% only briefly in the 1970s. Overall, however, it is a relative move in post-war terms: the maximum tax rate on ordinary income was 90% or higher from 1944 to 1963, 70% from 1965 to 1981, and 50% from 1981 to 1986. Americans have enjoyed unprecedented prosperity for the most part. from that time period.

Which brings us back to the idea of ​​the wealth tax, which terrifies the rich and their water carriers in the press and punditocracy. Noah Rothman of the right-wing National Review, for example, took particular issue with Michelle Obama’s criticism of “generational wealth affirmative action” in her speech at the Democratic convention on Tuesday night.

“The idea that accumulating material wealth and leaving an inheritance to your offspring with the hope that they will build on it and do the same for their children is one of the foundations of the American social compact,” Rothman grumbled. “It’s absurd to try to turn that sense of industry into a source of shame.”

The idea that the offspring of millionaires and billionaires build on their inherited wealth is nice, but in practice rare. As wealth management firm UBS reported last year, for the first time in its nine years of tracking extreme wealth, billionaires “accumulated more wealth through inheritance than through entrepreneurship.” This “large wealth transfer,” he added, “is gaining momentum.”

As I’ve written before, the concentration of wealth in America has reached levels that make the golden age of the 19th century look like slag. There were 66 billionaires in the US in 1990 and about 750 in 2023.

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Critics of the wealth tax often argue that it’s unworkable because it’s hard to value non-tradable assets—think artwork or almost anything other than stocks, bonds, and real estate, which can be valued at market price. The Biden plan has an answer to that. Non-marketable assets would be valued at their purchase price or their value the last time they were borrowed or invested, with an annual increase based on Treasury interest rates.

As for those who think there is something un-American about a wealth tax, they can take the matter to the Founding Fathers, who viewed generationally accumulated wealth as inimical to a free republic.

“Whenever there are in any country uncultivated lands and poor unemployed,” Thomas Jefferson wrote to James Madison in October 1785, “it is clear that the laws of property have been so extended as to violate natural right.”

Madison, in 1792, considered it the duty of political parties to act to combat “the inequality of property, by an immoderate and especially undeserved accumulation of riches.” Benjamin Franklin urged the Constitutional Convention in Philadelphia, albeit unsuccessfully, to declare that “the state has a right to discourage large concentrations of property as a danger to the happiness of mankind.”

They did not seem concerned that the struggle against immoderate accumulation of wealth would be complicated or futile. On the contrary: he would seem to agree, if he were with us today, with the line beloved of equality advocates that “every billionaire is a political failure”.

Put it all together and it almost sounds like Michelle Obama is channeling the founders. And if Kamala Harris supports provisions in the Biden budget plan aimed at forcing the super-rich to pay their fair share of taxes — as her campaign confirms — she’s also channeling them.

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This story originally appeared in the Los Angeles Times.