For all the noise progressives have made about taxing wealth, it remains an idea confined to the radical fringes of the Democratic Party. More level-headed legislators recognize that taxing wealth is economically harmful, administratively nightmarish and rightly avoided by most of the rest of the developed world. Enter mark-to-market taxation — a theoretically less polarizing way to tax wealth with nearly all the same drawbacks.
The U.S. tax code generally does not tax on-paper wealth because it is almost entirely theoretical until turned into income. Your car probably became significantly more valuable over the past year, but that means very little unless you actually sold it. If you hold onto your car until car prices return to normal, that on-paper increase in the value of your car over the past year will disappear without it ever benefiting you in the slightest.
Don’t tell that to proponents of mark-to-market taxation, though. A mark-to-market tax system would tax unrealized capital gains annually, rather than when the asset is sold and the gain is realized.
Sensationalized news reports frequently promote confusion about unrealized gains. For example, a bogus “analysis” by Americans for Tax Fairness last year claimed that billionaires made $434 billion off the pandemic by cherry-picking stock value increases that happened after the market had already crashed. More recently, a report that Mark Zuckerberg lost $6 billion after the crash of Facebook’s stock value led one confused Twitter user to ask where the money went. Individual wealth and capital markets are hard enough to understand, but particularly so when quoting on-paper wealth that never reached someone’s pocket as income in the first place.
Nevertheless, Senate Finance Committee Chairman Ron Wyden has proposed a framework for a mark-to-market tax system in the past, albeit one that punted on a lot of key questions about how such a system would work. As Democrats have begun to scramble for ways to pay for a reconciliation bill that could end up costing taxpayers as much as $5.5 trillion over a decade once accounting for budget tricks aimed at disguising the real price tag, Wyden has floated trial-balloon versions of mark-to-market taxation specifically for derivatives and carried interest. Doubtless if these proposals caught on he would try to push for a broader version.
Mark-to-market taxation is functionally a more limited version of wealth taxation, levied on the unrealized increase in the value of tradable assets rather than a taxpayer’s total wealth. That doesn’t make it “better,” though.
For instance, a major drawback of wealth taxation is the administrative difficulty of valuing thousands of taxpayers’ entire estates every single year to establish tax liability. While many assets subject to mark-to-market taxation would be fairly easy to value, such as stock portfolios, others, like shares of privately-held companies, would be far harder.
Other administrative difficulties abound. Any such system of taxing unrealized capital gains would have to figure out a way to account for capital losses like the aforementioned hole in Mark Zuckerberg’s portfolio, lest taxpayers face a “heads I win, tails you lose” system of paying taxes on unrealized gains one year then being left out to dry should those gains disappear the next. A means of allowing cash-poor but asset-rich taxpayers, such as entrepreneurs, to defer tax payments, would also need to be created.
And it’s not just administrative issues and the unfairness of taxing unrealized gains that make a mark-to-market tax system unwise. Having to pay taxes on unrealized gains would discourage taxpayers from saving and investing in the first place, reducing available investment capital that businesses need to grow the economy.
Democrats may hope that the relatively-unknown nature of mark-to-market proposals will shield them from taxpayer backlash over poorly-conceived spending offsets. Taxpayers need to know about mark-to-market taxation so they can make sure Congress doesn’t try to sneak it by them in a gargantuan spending package.
Andrew Wilford is a policy analyst at the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.