Most Americans pay taxes every other week. Part of every paycheck is withheld, then they file taxes in April to account for the difference. Rich people file a tax return in April too, but in any given year they are probably not paying any taxes on a huge part of the increase in their personal wealth. That’s because the majority of a rich person’s “income” doesn’t usually come from a paycheck, but rather from investments. Unlike wages, which are taxed in real time, investment growth is only taxed when the investment is sold. Switching to a “mark-to-market” system, which would tax the increase of an investment’s value (capital gains) every year, would ensure that rich people pay their taxes on the same schedule as regular Americans.
While most Americans work for their money, rich people’s money works for them. Their stocks, bonds, real estate, and other assets increase in value over time, and they can sell those assets for a profit when they feel like it. The longer they hold onto an asset, the greater the capital gains, and the longer they skip out on paying taxes on those gains. In this way, rich people can build wealth more quickly than folks who pay taxes every year (or every paycheck), and get to choose when to pay their taxes. Even worse, there are ways to get around paying those taxes entirely.
The truly insidious part of the way we currently tax capital gains is the way the delay interacts with other parts of the tax code that give the wealthy preferential treatment, especially those concerning inheritance. Under Trump’s expanded estate tax exemption, rich people can pass on up to $11.4 million tax-free to an heir. Once inherited, the capital gains that accrued during the original asset-holder’s life are wiped clean by a provision in the tax code known as stepped-up basis. The price the original holder paid for an asset is known as the “basis,” which is subtracted from the price they sell to calculate capital gains.
As an example, let’s say someone buys $1 million in stocks that grow to $10 million in value over their lifetime. If they sold them, they would pay taxes on capital gains of $9 million. On the other hand, they can pass them on to an heir tax-free. Then the basis is “stepped up” to $10 million, so if the heir sells those stocks that same day they would pay nothing in taxes. If the heir sells the stock at $20 million down the line, then they would only pay taxes on the $10 million in gains since they inherited them rather than the $19 million since they were first obtained. All the time it took for the stocks to grow ten times in value is wiped away in an instant.
This amplifies inequality across generations. Not only do rich individuals get richer, rich families get a break on taxes with each generation, making it easier for dynasties of unimaginable wealth to form and grow. There is no good reason for this. Rich people are already doing well for themselves and don’t need special treatment from the IRS on top of that. They should be paying their fair share instead.
Moving to a mark-to-market system would do away with many of the special perks rich folks enjoy and incentives to hoard wealth. At the end of the day, it’s only fair that the rich pay their taxes on the money they make when they make it, just like anybody else.