I have been a subscriber to and reader of The Economist for almost 20 years. I have appreciated their balanced and intelligent coverage of world events, with a perspective of classical economic liberalism (free markets, free trade, deregulation, and globalism). Yet I find myself in the unusual position of taking issue with two of their recent articles: “How to tax billionaires – and how not to” and “America’s rich never sell their assets. How should they be taxed?”
As the aforementioned headlines make clear, The Economist is in favor of taxing America’s rich at a higher level than under current law. They just don’t believe that President Biden’s “Billionaire Minimum Income Tax” proposal – which would institute a 25% minimum tax on the full income of households worth more than $100 million – is the best way to accomplish this aim. For Biden’s proposal, the full income of wealthy households would include their unrealized capital gains, which are value increases of assets that have yet to be sold, i.e. “realized,” by investors.
I disagree. America does need to tax unrealized capital gains on a regular basis, whether through President Biden’s proposal or similar ones put forth in recent years by members of Congress.
Since The Economist forthrightly lays out its background and positions, I’ll start by doing the same. I am a wealthy individual (not quite wealthy enough to qualify for Biden’s tax, but still wealthy) who believes rich folks like me should pay more in tax to support the collective enterprise we call the United States of America. This is why, two years ago, I joined the Patriotic Millionaires.
A bombshell report from ProPublica in 2021 revealed just how little some of America’s wealthiest individuals pay in federal income tax. Between 2014 and 2018, the richest 25 Americans paid an effective income tax rate of just 3.4%; in some years, Elon Musk and Jeff Bezos have actually paid $0 in income tax. While our tax system is fairly complicated, the way that they managed to do this is actually pretty simple: our income tax system does not treat unrealized capital gains as income. According to an analysis by Americans for Tax Fairness, in 2022, Americans with over $100 million in wealth collectively held $8.5 trillion in unrealized capital gains. That’s a treasure trove of wealth that, in theory, could never be taxed.
The Economist recognizes this lack of taxation on unrealized gains as a problem, but wrongly rejects taxing unrealized capital gains on a regular basis over problems they perceive with fairness, constitutionality and administration. Instead, to tackle the problem, they advocate doing away with the stepped-up basis and other tax loopholes and taxing unrealized capital gains at a person’s death.
As discussed more fully below, none of The Economist’s reasons for opposing Biden’s Billionaire Minimum Income Tax withstand scrutiny. A proposal like Biden’s that taxes unrealized capital gains regularly is exactly what America needs.
Fairness
The Economist believes that taxing unrealized gains is unfair because “[they] are, in many ways, unreal. After all, the value of assets could change the day after a tax is paid.” But lenders extend loans based on reality. If wealthy people can use their assets as collateral to secure low-interest loans to fund their extravagant lifestyles, then they are absolutely “real” and should be taxed as such. Also, investors decide on a daily basis whether to hold an investment or sell it and buy a different one. There is no reason why the investor who decides to sell their stock in Amazon to buy Google should be taxed differently than the investor who chooses to hold onto their Amazon stock.
It’s true that the stock market fluctuates, but that does not justify wealthy investors not paying an annual tax on their capital gains. Biden’s proposal factors in stock market volatility by assessing the tax over five years. Average workers in this country arguably experience far more “fluctuation” in their lives – maybe not through the stock market, but through job loss, cost of living increases, benefit cuts, etc. – yet are still expected to pay tax regularly on every paycheck they receive. The same should be expected of anyone who makes a killing on Wall Street. After all, even on a bad day, the 50,000 ultra-wealthy households that Biden’s tax would affect are doing well enough to pay their fair share in taxes.
Lastly, we should not and cannot wait until ultra-wealthy people pass away to begin to address the dire threat that extreme wealth inequality poses to our democracy. Today, just 131,000 households in America control over $20 trillion in personal wealth. Their immense fortunes have translated into immense power, which they have used to shape public and private life in America to an inordinate degree. We need to use our tax code to immediately put a check on extreme wealth, and this must involve taxing unrealized gains on a regular basis. I don’t think that’s unfair at all.
Constitutionality
Contrary to what The Economist suggests, taxes on unrealized capital gains are constitutional – well, for now, at least. Last month, the Supreme Court issued a narrow ruling in Moore v. US that upheld the constitutionality of the 2017 Tax Cut and Job’s Act mandatory repatriation tax. But in their opinions, four Justices – Barrett, Alito, Gorsuch, and Thomas – signaled their willingness to declare taxes on wealth and unrealized gains unconstitutional in the future.
At the end of the day, I believe that Congress has broad authority to tax citizens to keep our country running effectively. I don’t see the conservative majority currently on the Court as tax experts, especially when half of them have received brazenly inappropriate gifts from tax-avoiding billionaires over the years. In short, we should not be afraid to pass reasonable tax laws just because an out-of-touch, unaccountable group of six might try to get in the way.
Administration
No one can deny how difficult it is to value some assets of wealthy people, which unfortunately gives them a window to evade tax without consequence. But that’s no reason to abandon all hope on taxing unrealized gains, as The Economist urges.
For decades, the IRS has administered the estate tax, which requires taxpayers to value a myriad of asset types, and the federal government to review those valuations. Fewer than 50,000 taxpayers will be subject to these valuation “burdens” under Biden’s tax proposal. As a rich person, I am required to value all of my assets quarterly and share those valuations with bankers and investors. Rich people know what their assets are worth, and to make a tax on unrealized gains work, they could simply be required to share that information with the government.
Even without a regular tax on unrealized capital gains, wealthy people avoid and evade taxes. Rich households hire armies of lawyers and accountants to park money in trusts and tax havens, with the aim of skirting the little taxes they have to pay. But as we’ve seen in recent months, as long as the IRS is properly funded, they can go after wealthy tax cheats with hard-to-value assets and ensure that they pay their rightful share in taxes.
The Economist’s logic here is specious. We don’t enact laws based on the ease of enforcement. We enact them based on whether they’re good policy. Prosecuting insider trading, for example, is extremely difficult. Most cases likely go undetected. Yet no one seriously proposes the repeal of insider trading laws. By the same logic, if taxing unrealized gains of the ultra-rich represents good policy, the difficulty of enforcing the tax is not a valid argument against it.
Conclusion
If we want to save our beleaguered democracy from the threats posed by extreme wealth, we have to start by fixing our tax code to ensure it properly taxes rich people like me. And if we want to fix our tax code in this way, we need to start by taxing unrealized capital gains on a regular basis like President Biden has proposed with his Billionaire Minimum Income Tax. The Economist may think otherwise, but there’s no other way around it – and too much on the line to fail to do so.