The idea of a tax on unrealized capital gains

Holden:

Hi, a dumb question about US politics here: Who originated the idea of a tax on unrealized capital gains and who if anybody is supporting that idea now?

ChatGPT:

The idea of taxing unrealized capital gains—gains in the value of an asset before it's sold—has been floated in recent years primarily by progressive lawmakers and thinkers. The concept is often attributed to Senator Elizabeth Warren and other progressive Democrats as part of broader tax reform proposals aimed at taxing wealth more effectively. Origins:

The idea is tied to the wealth tax proposals championed by Elizabeth Warren and Senator Bernie Sanders during the 2020 Democratic primary campaign. They proposed taxing the net worth of the ultra-rich, including unrealized capital gains, to address wealth inequality. It gained further visibility when Biden administration officials like Treasury Secretary Janet Yellen mentioned the possibility of taxing unrealized gains as a way to prevent the ultra-wealthy from indefinitely deferring taxes.

Supporters:

• Senator Elizabeth Warren has been one of the most vocal advocates for some form of wealth tax, which could include unrealized capital gains.
• Senator Bernie Sanders has also supported proposals to heavily tax the wealthiest Americans, potentially including unrealized capital gains.
• Janet Yellen, as Treasury Secretary, mentioned it as an option worth exploring in 2021, though it wasn’t adopted in Biden’s 2021 tax reform plan.
• Ron Wyden, chair of the Senate Finance Committee, introduced a version of this idea in 2021 as part of a broader proposal to overhaul the tax code. His plan aimed to tax the appreciation of stocks and other assets each year, even if they aren't sold.

Current Status:

The idea has gained some momentum among progressive circles but has not been enacted into law. It's a contentious issue, with strong opposition from conservatives, business groups, and some centrist Democrats, who argue it would be difficult to implement, could lead to liquidity issues, and might create economic distortions. The concept remains part of the broader conversation about how to address wealth inequality and raise revenue from the ultra-rich.

Holden: Would that not raise the possibility of ordinary people being forced to sell houses that they have owned for more than ten or fifteen years, just to pay such taxes?

ChatGPT:

Yes, taxing unrealized capital gains could indeed raise that concern. For ordinary people, especially homeowners, it could mean facing substantial tax bills on the increased value of their homes even if they haven’t sold the property. This scenario could force some to sell their homes just to cover the tax burden, which is why the idea is so controversial. Key Issues:

Home Appreciation: In areas with rapidly rising property values (e.g., parts of California, New York), long-term homeowners might see significant unrealized gains on their properties. A tax on those gains, even without selling the home, could result in a substantial tax liability.

Liquidity Problem: Many homeowners (or others with appreciated assets) might be "asset-rich but cash-poor." This means they own valuable assets but do not have enough liquid cash to pay a large tax bill. The result could be forced sales of homes or other assets just to cover taxes.

Housing Market Impact: If a significant number of people had to sell their homes to pay such taxes, it could lead to a surge in property listings, potentially destabilizing local real estate markets.

Mitigating Proposals:

Some proponents of taxing unrealized capital gains have suggested exemptions or deferrals for primary residences to address this concern. For example:

Primary Residence Exemption:

The tax could exclude unrealized gains on an individual’s primary residence. Deferral Until Sale: One potential compromise is to tax unrealized capital gains only when the asset is sold, not annually. This would avoid the issue of taxing paper gains before homeowners have access to the cash from the sale.

Opponents' Argument:

Critics often highlight that such taxes could unintentionally hurt middle-class homeowners and retirees who have held onto property for many years and seen its value increase. They argue that the policy is aimed at the ultra-wealthy but could end up affecting ordinary people unless carefully crafted with exemptions and safeguards.

This concern is one of the main reasons why taxing unrealized capital gains hasn't gained widespread political traction, despite support from some progressive figures.
Holden:
Does Kamala Harris support this idea?

ChatGPT:

Yes, Kamala Harris supports the idea of taxing unrealized capital gains, but only for the very wealthy. Specifically, she has backed President Biden's proposal to impose a 25% minimum tax on unrealized gains for individuals with net wealth over $100 million. This proposal is part of broader efforts to tax the ultra-rich more effectively, targeting their wealth accumulation, even when they haven't sold their assets.

The tax would not apply to middle-class homeowners or people with more modest investments. It’s designed to affect only a small group of the wealthiest Americans, ensuring that they cannot indefinitely defer taxes on assets that appreciate in value but are not sold. Critics argue that such a tax could create administrative challenges and might disincentivize long-term investment​(Tax Foundation )​(FactCheck.org )​(Benzinga ).

So, the concerns about ordinary people being forced to sell homes due to such a tax don't apply under the current proposal, which is specifically aimed at households with wealth above $100 million.

Holden:

Nonetheless such measures have a history of trickling or filtering down to ordinary people. The income tax was originally meant to be only for the rich...

ChatGPT:

You're right that many tax measures, initially aimed at the wealthy, have eventually expanded to affect a broader portion of the population. The U.S. federal income tax, for instance, was originally intended to tax only the rich when it was implemented in 1913. Initially, it applied to less than 1% of Americans and had a top rate of 7%. However, over time, it evolved into a system where most working Americans pay income tax, with the top rate peaking at 94% during World War II.

This pattern fuels concerns about proposals like the tax on unrealized capital gains. Though they are currently aimed at individuals with net worths above $100 million, people fear that once the system is in place, future governments might expand its scope to affect smaller asset holders, like middle-class homeowners, especially as government revenue needs grow. Key Concerns:

Expansion of Tax Reach: There's historical precedence for taxes being expanded beyond their initial targets. The concern is that over time, governments facing revenue shortfalls could lower the threshold for this tax, gradually encompassing more people.

Complexity and Administrative Burdens: Critics argue that taxing unrealized gains could introduce complex valuation challenges, particularly for non-liquid assets like homes or private businesses. This could create opportunities or pressures to broaden the tax to other forms of wealth.

Political Reality: Once the infrastructure for taxing wealth or unrealized gains exists, there could be political pressure to apply it more broadly, particularly in times of fiscal crisis.

While proponents argue that these measures are necessary to address wealth inequality and ensure the ultra-rich pay their fair share, skepticism about future scope creep is common in tax policy debates​(Tax Foundation )​(Benzinga ).