I agree with Warren Buffett that he and his fellow billionaires shouldn’t pay lower tax rates than their secretaries. But I don’t think President Biden’s so-called billionaire minimum income tax is the right way to fix things. I hope Vice President Kamala Harris will propose a different approach.
The Times reported last week that some Wall Street and Silicon Valley donors to Harris’s presidential campaign were quietly trying to persuade her to drop her support for Biden’s billionaire minimum tax, which involves requiring people worth at least $100 million to pay taxes on investment gains even if they have not sold the assets that have appreciated.
The natural reaction to the donors’ behind-the-scenes lobbying is, “How dare you?” Robert Kuttner, a co-editor of The American Prospect, wrote, “You have to wonder, what’s wrong with these people? How much money do you need?”
But if you lower the flame under the rage pot, you start to see that there are some genuine problems with trying to tax what economists call “unrealized capital gains” — paper wealth, in other words.
The way the tax code works now, you don’t owe any tax on the appreciation of an asset such as a share of stock or a bond until you sell it. Then you’re taxed on the difference between what you bought it for and what you sold it for — the capital gain.
Under Biden’s plan, people worth at least $100 million would be taxed at a 25 percent rate on their “full income,” which would include not just standard stuff like wages and investment income (interest, dividends, rents), but also the increase in value of their assets.
Harris has endorsed the billionaire minimum income tax as a concept, but she hasn’t said much if anything specific about the tax on unrealized capital gains. That leaves open the possibility that she could come up with another way of getting at the same objective, which I think would be a good thing.
The problems with taxing gains that exist only on paper include administrative complexity and their potential negative effect on entrepreneurship.
A company founder who hits it big could have millions or billions of dollars in paper wealth while still sleeping on a futon. Lacking cash, that person would have to sell shares to pay the tax, reducing his or her ownership share. That would really sting if the stock fell in the year after its big run-up, as shares in volatile start-ups often do, so that the tax had to be paid with devalued shares. Such a tax could strongly discourage investors from putting money into startups, Rob Arnott, the founder and chairman of Research Affiliates, has been arguing for years. (Although the tax on one year’s gain could be paid in installments over several years.)
Then there’s the paperwork and inevitable legal skirmishing. Tyler Cowen, an economist at George Mason University and a prolific writer, pointed to a Treasury Department document that wades into the different treatment of tradable and non-tradable assets, the designation of some taxpayers as “illiquid,” and the procedure for appealing the government’s valuation.
Biden’s proposed tax implicitly assumes that people who buy and hold are in the same situation as people who cash in, but that’s not correct.
Let’s say stock prices go up, even though there’s no change in expected earnings. The person who sells and cashes in on the higher valuation is in better shape than the person who doesn’t sell and is earning nothing more than the same old stream of dividends, so it’s unfair to treat them the same, according to a paper by Mark Aguiar of Princeton, Benjamin Moll of the London School of Economics and Florian Scheuer of the University of Zurich.
Moll tweeted about this recently. “Ask a normal person, ‘Should we tax unrealized capital gains?’ and most will say ‘Of course not, they’re paper gains unless you sell!’ ” he wrote, adding, “Crazy thought: Maybe just maybe the normie intuition is more or less correct?”
One good thing about Biden’s plan is that it would undermine the rich person’s tax avoidance strategy known as “buy, borrow, die.” That’s where rich people finance their luxurious lifestyles by borrowing against their assets rather than selling them. That way they don’t incur capital gains taxes. When they die, their heirs don’t owe taxes on the past appreciation, only on appreciation that occurs after they inherit the assets. That’s called a step-up in the basis for valuation. Biden’s plan would make sure the capital gains get taxed bit by bit as the years go by, making the step-up in basis at death irrelevant.
But there’s a much easier way to defeat the “buy, borrow, die” strategy. Instead of taxing unrealized capital gains, which promises to be an ugly mess, simply eliminate step-up in basis for heirs so when they do sell, they pay tax on all of the capital gain, not just the gain after inheritance. In an interview, Aguiar, Moll and Scheuer told me that they support getting rid of the step-up in basis, which they called a loophole.
For Harris, dropping the tax on paper gains would close one avenue of attack on her by former President Donald Trump. At a speech to the Economic Club of New York on Thursday, Trump told finance executives, “If you happen to have a lot of wealth but no cash” — lowering his voice to a growly stage whisper — “you’re in a lotta trouble.”
Harris doesn’t need that needling from Trump. Alex Tabarrok, a colleague of Cowen at George Mason and the blog, wrote, “Eliminate the stepped up basis, declare victory and go home.” Sounds like good advice to me.
The Readers Write
Regarding your newsletter on unemployment and job openings: The phrases “loose labor market” and “tight labor market” appear to be from the point of view of employers. From the point of view of laborers they are reversed in meaning. There are a lot more laborers than employers, so maybe we should work out something that reflects the need of each for the other.
David Gray
Guinda, Calif.
The inflation that followed the Biden stimulus needs to be seen in light of the unemployment that didn’t happen.
Tom Chase
Northwood, N.H.
As a small manufacturer of retail grocery food products, it is often difficult to find unskilled workers to show up consistently. Perhaps they have no fear of being unemployed. Any small business owner is likely to say he’s competing with the state unemployment system, no matter the increased minimum wage. Small businesses are the backbone of our country and they need to be heard at places like the Jackson Hole conference.
Rob Salamida
Johnson City, N.Y.
You wrote about Senator Amy Klobuchar’s bill against collusive price-setting algorithms. There is more to collusion than collusion in pricing — there’s collusion in salary setting. In the 1990s, human resources people would get salary information shared voluntarily from other comparable employers. Maybe Klobuchar could look at this, too.
John Mardinly
Chandler, Ariz.
It’s so refreshing to see a member of Congress who is aware of modern technology and also acting to get ahead of problems it causes before they spiral out of control! Hopefully the others can get on board.
Jessyca Frederick
La Quinta, Calif.
Quote of the Day
“To signal taste, you need art where the difference between good art and bad art is very hard to discern (if anyone could discern it, then ability-to-discern wouldn’t signal having more taste than average). You want some kind of complicated code that makes sense to tasteful people, feels impenetrable to tasteless people, and (if possible) changes every so often so that tasteless people can’t just memorize it.”
— Scott Alexander, Astral Codex Ten, “Whither Tartaria?” (Sept. 23, 2021)
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