WILFORD: Wyden’s Breathtakingly Terrible Idea To Tax ‘Unrealized’ Capital Gains

REUTERS/Kevin Lamarque

Andrew Wilford Contributor
Font Size:

Another day, another Democratic tax idea which could prove economically devastating.

Sen. Ron Wyden (D-Ore.), not to be outdone by similar terrible ideas from his Senate colleagues — such as Sen. Bernie Sanders’ (I-Vt.) estate tax increase or Elizabeth Warren’s wealth tax proposal — recently introduced a proposal to tax unrealized capital gains. This policy, as Sen. Pat Toomey aptly put it, is a “breathtakingly terrible idea.”

Under current policy, capital gains, such as increases in value for held stocks, are only taxable when they are “realized.” In other words, if you own stock that increases in value from $1,000 to $1,500, you’re only liable to pay taxes on the $500 increase in value if you sell the stock at $1,500 and “realize” the $500 gain.

Wyden’s idea, on the other hand, would replace this simpler system with one in which capital gains would be taxed annually whether or not they were realized. In other words, if a stock you held increased in value from $1,000 to $1,500, you would still be liable for that $500 gain even if you didn’t sell and the value only changed on paper.

Wyden would counter that this is an oversimplification, and to an extent he would be right. Long-term capital gains, or capital gains on assets held for more than a year, enjoy a substantial zero percent bracket. Yet short-term capital gains, or capital gains on assets held for less than one year, are taxed as ordinary income. Without changes to this structure, Wyden would be imposing a tax on every new asset a taxpayer acquires that gains any value at all during that year.

More Americans would be affected by this change than one might think. The percentage of Americans that owned stock in 2016 (52 percent) was not far off the percentage of Americans that paid income taxes that same year (56 percent). On top of that, roughly 60 percent of Americans hold a personal retirement account, such as an IRA or 401(k). Should American taxpayers be expected to pay taxes each year on gains here?

When tax is assessed when gains are realized, compliance is simple — values are established when the asset is purchased (how much you spent) and when the asset is sold (how much you received). And that value isn’t subject to interpretation or manipulation; the gain is a simple matter of arithmetic.

But a tax on unrealized capital gains would be an administrative nightmare prone to gaming.  Similar to the problems with Warren’s wealth tax, some assets are difficult to value. Stock in publicly-traded companies is easy enough to assess, but the value of something like a rare art piece is near-impossible to establish since there are so few potential buyers and few comparable sales to use as guideposts. Thus the ultra-wealthy are likely to employ expensive accountants to go to great lengths to minimize the on-paper value of their assets. Needless to say, middle income Americans will have no such luxury.

Additionally, how would Wyden handle asset value declines? Presumably Wyden is not proposing that taxpayers receive a tax credit when an asset declines in value, but assets such as stocks can be notoriously fickle. Imagine being stuck paying taxes on unrealized capital gains for years, when the company you invested in suddenly goes out of business and your asset becomes worthless. Essentially, you could be forced to pay tax on years of speculative on-paper “gains” for an asset that is now worthless.

For all these reasons, Wyden’s proposal is a terrible way to alleviate income inequality. Wealth and unrealized capital gains taxes are an administrative nightmare to assess, creating unnecessary hassle and leaving room for the hyper-wealthy to escape them.

Awful tax policy ideas are unfortunately in vogue for Democrats this election cycle. Here’s hoping they get serious sometime soon.

Andrew Wilford (@PolicyWilford) is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to fiscal policy analysis and education at all levels of government.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.