President Biden and congressional Democrats have wanted “the wealthy” to pay their “fair share.” The way they want to do this should alarm everyone. Biden and the rest of the Democrats want to tax unrealized gains on assets such as equities, real estate, and collectibles would be subject to yearly taxation under their proposed tax reform.
Here is why everyone should be alarmed by this idea, it would vastly increase the IRS’s authority and add complexity to the tax law. It can potentially affect millions of people, hurt the economy, and is probably unlawful.
According to President Biden’s fiscal year 2023 budget proposal, people with income and assets over $100 million would be taxed at 20 percent, resulting in a $360 billion tax hike. This tax is comparable to levies long favored by progressive legislators such as Sen. Elizabeth Warren (D-Mass.) and Sen. Bernie Sanders (I-Vt.).
People pay capital gains tax only when they sell a capital asset. This proposal would establish a “mark to market” system, requiring Citizens to pay annual taxes on the appreciation of assets such as stocks, collectibles, and real estate.
To implement this tax, the IRS would be given expansive new powers to assess the value of taxpayers’ assets. This would be a very intrusive and challenging task. The agency must maintain exhaustive listings of its assets, including jewels, artwork, baseball cards, and more. Given the IRS’s history of prejudice and misconduct, it is unsettling that agents will collect this information. In the event of a leak, which frequently occurs at the IRS, taxpayers might be victims of burglary or, at least, a severe invasion of privacy.
There would also be considerable administrative and compliance challenges associated with this tax. Many assets are difficult to value; thus, taxpayers and the federal government would be compelled to employ armies of accountants and attorneys to evaluate values.
A tax on unrealized gains would be economically detrimental. A tax on unrealized gains will entice taxpayers to migrate overseas to avoid the tax, resulting in the outflow of much-needed capital from the United States. For people who maintain their assets in the United States, this tax will nonetheless reduce fresh investment in the economy, resulting in pay reductions for working families.
According to estimates, comparable taxes would reduce innovation and investment, lowering wages and generating unemployment. According to research by the American Action Forum (AAF) on Warren’s $3 trillion wealth tax proposal, the tax would reduce GDP by $1.1 trillion over ten years and labor income by $785 billion over the same period.
While Democrats say this scheme would only affect 700 individuals, it is possible that millions of Americans would be subject to this tax.
In 1969, Congress passed the Alternative Minimum Tax (AMT). They targeted 155 individuals with adjusted gross incomes over $200,000 who lawfully paid no federal income tax owing to their substantial municipal bond purchases.
Nonetheless, the AMT grew so enormous that by 2010, thirty million Americans (20% of filers) were subject to the tax. Congress was then required to narrow the scope of the tax.
In addition, the Biden tax is unlawful. Article I, Section 9 of the United States Constitution prohibits the federal government from levying direct taxes unless they are allocated. The 16th Amendment was drafted to permit income taxation to circumvent this constitutional limitation. In Eisner v. Macomber, the Supreme Court declared unequivocally that a tax on unrealized gains violates Article I, Section 9, and the 16th Amendment.
The tax structure is already quite progressive, despite the left’s insistence that unrealized gains must be taxed to guarantee that the wealthiest “pay their fair part.”
In 2018, the top one percent of earnings paid 41.7 percent of income taxes and 25.9 percent of federal taxes, according to the Congressional Budget Office. The wealthiest 20% of earners contributed 90.9% of income taxes and 69.8% of all federal taxes. According to the Heritage Foundation, the “wealthy” pay over 40 percent of income taxes yet earn just 21 percent of all income. The lowest 50% pay only 3% of income taxes, while the bottom 75% pay only 13%.
In addition, the Joint Committee on Taxation determined that taxpayers with incomes of $1 million or more pay an average federal tax rate of 31.5 percent. In comparison, individuals with incomes of $63,179 or less pay an average federal tax rate of 6.3 percent.
The Biden tax will complicate the tax law and increase the IRS’s authority. It will wreak havoc on the economy and affect many more Americans than originally anticipated.