Ever searching for new ways to “spread the wealth around,” Sen. Ron Wyden (D-OR) has floated the asinine idea of taxing individuals’ unrealized gains in asset prices. Currently, capital gains tax is paid only when an asset is sold.
As absurd as that sounds, it gets even worse. Wyden’s plan proposes taxing these gains as ordinary income, for which the top rate is 37%, as opposed to the current, lower tax rate of 23.8% for capital gains.
Wyden said that his proposal “eliminates serious loopholes that allow some to pay a lower rate than wage earners, to delay their taxes indefinitely, and in some cases, to avoid paying tax at all.”
The senator’s intention is that the super wealthy would pay most of the new tax. According to the nonpartisan Tax Policy Center, “among households making more than $10 million in adjusted gross income in 2016, capital gains accounted for 46.4% of income.
However, the effects of this plan would felt by a large number of taxpayers, including many middle-class Americans who own stocks or small businesses.
The plan would require estimating the cost of every asset at year-end to determine the price appreciation (or depreciation) and paying the tax. It would be a fairly easy matter for assets which are traded on an exchange.
For example, an investor buys 100 shares of a stock valued at $75 per share and pays $7,500. At the end of the year, let’s say the price has risen to $100 per share, a gain of $25 and the investment is now worth $10,000. Even though the asset has not been sold, this investor would pay tax of $925 for that tax year (37% of $2,500).
If the stock is held for another year, and it increases to $125 per share, another $925 would be owed. So far, $1,850 in taxes have been paid.
In the third year, the investor sells it for $150. Another $925 would be owed for a total tax of $2,775.
Under the current rules, the seller would owe tax of $1,785 for the tax year in which it was sold. They would pay $1,000 less in total taxes upon the sale and nothing in between.
It would become very complicated if the price appreciated one year, then depreciated the next. It would turn into a logistical nightmare, especially for active traders.
Wyden’s plan would create even more problems for those who own small businesses. Imagine trying to value a business every year.
According to the Wall Street Journal, this idea has been raised in the past mostly by academics and one study estimated that, if implemented, the government would collect an additional $125 billion in annual revenue.
The article cites as an example an individual who buys $1 million dollars of stock in 2002. It has a current value of $10 million. Under Wyden’s plan, the investor would pay 37% of each year’s gain in taxes. Under the current tax law, no taxes would be paid until the stock was sold. And the gain would be taxed at 23.8% instead of 37%.
Additionally, if the individual left the stock to an heir, no tax would be owed on the gain. Under current estate tax laws, heirs pay capital-gains taxes only on gains occurring after the prior owner dies.
And it is this scenario which drives Democrats the craziest.
Sen. Pat Toomey (R-PA) called Wyden’s plan a “breathtakingly terrible idea.” He said “capital gains get preferential rates now for several reasons, including to mitigate inflation. Under Mr. Wyden’s proposal, someone could pay taxes on an investment one year as it rises, even if the investment later falls.” He added that “the plan would go nowhere as long as Republicans control one part of the government.”