Democratic presidential nominee Kamala Harris’s plan to tax unrealized capital gains on the ultrawealthy needs further elaboration to assess its viability, say tax policy observers.
The proposal, part of the billionaire minimum income tax that President Biden has proposed in his budget for the past several years, would require individuals with a net worth of over $100 million to pay a minimum effective tax rate of 25 percent, which could include taxes on unrealized capital gains.
Republicans have sought to portray the measure as a starting point for Vice President Harris and Democrats to eventually tax unrealized gains on middle-income Americans and small businesses. But tax policy watchers have expressed more technical concerns over how the plan would work.
Kyle Pomerleau of the American Enterprise Institute said he understands — although doesn’t agree with — Harris’s more expansive view of income but believes the structure of the proposal could backfire.
“What makes this complicated is that it is put together as a minimum tax, so you’re going to have taxpayers that may or may not pay this tax year over year, and that requires more administrative burden, information reporting issues, and may also lead to tax avoidance,” Pomerleau told Tax Notes.
Given that some taxpayers could have other sources of taxable income that would help them reach the 25 percent threshold without taxing unrealized gains, it could lead to the rule being inconsistently enforced, Pomerleau said. “That’s the downside; they’re not going for a straightforward version of this,” he added.
Pomerleau also pointed out that Harris has yet to explain what would happen if taxpayers subject to the minimum tax have assets that decline in value.
“It’s straightforward to think how this tax would work with gains, but to make this work economically, you also have to provide deductions or offsets for losses,” Pomerleau said. “To make this neutral and avoid tax avoidance, you want to make sure those losses are being deducted at the same rate as gains are potentially being realized and taxed. . . . It’s not clear how they would make that work.”
Treasury’s latest green book, which outlines Biden’s proposed fiscal 2025 budget, including the billionaire minimum tax, offers clues for how that scenario would play out.
“According to the plan, you can get a refund upon realization of an asset if the prepayments are greater than the actual gain,” noted Andrew Lautz of the Bipartisan Policy Center. But he added that if Harris wins the White House, “it’s very possible that . . . this particular proposal takes a different shape than what the Biden administration has done.”
Echoing Pomerleau, Lautz said he believes Harris’s proposal will be difficult to implement in practice, especially when it comes to valuing assets. While assets such as stocks and bonds could be straightforward to assess, “it can be hard to figure out year to year, for a company that is not publicly traded, what’s the true value of the company,” he said. “It becomes tricky both for the taxpayer and the IRS.”
Blueprint on File
According to Brian Galle of Georgetown University Law Center, most questions regarding Harris’s plan for a potential tax on unrealized capital gains can be found in a bill introduced last year by Rep. Steve Cohen, D-Tenn.
The Billionaire Minimum Income Tax Act (H.R. 6498), which Galle said he helped write, would provide refunds if it were found that a taxpayer paid more in tax than what an asset was worth.
Galle pointed out that under the bill, the tax on unrealized gains — which matches Harris’s plan by applying only to those with a net worth over $100 million — can be spread out, thus reducing its impact.
“Taxpayers would have nine years to pay, so in many cases the government might not give a refund if they didn’t receive a payment,” Galle said. “So if an asset goes down, it could just reduce the value you still owe.”
Galle dismissed concerns about potential issues in valuations, arguing that the proposal’s use of the mark-to market system — an accounting method used to assess the value of a company or an individual’s assets — is a proven way to measure wealth fluctuations.
While Galle believes Harris would most likely draw from the bill introduced by Cohen, he acknowledged that might not be the case. “The campaign doesn’t have to use the bill used in the last Congress,” he said.
Constitutional Questions
For Lautz, a key consideration yet to be fully addressed is whether a tax on unrealized capital gains can withstand judicial scrutiny.
“There’s a serious open question over whether such a tax violates the realization principle and could potentially be struck down by the Supreme Court,” Lautz said.
The Supreme Court’s recent landmark decision in Moore v. United States didn’t put to rest all the questions surrounding the constitutionality of a wealth tax, Lautz continued. “Even though that case was narrowly about a tax on U.S. business income earned abroad, some of the motivation for the litigants in that case was to get the Supreme Court to essentially issue a preemptive strike on any kind of wealth tax, which they did not,” he said.
However, Lautz pointed out that four of the justices in concurrence with the ruling suggested they would be inclined to call a wealth tax unconstitutional.
Galle believes the concept of a tax on unrealized gains is being misunderstood. “What a lot of people are missing is that this is a realization-based tax,” he said, pointing out that whether a taxpayer owes taxes or is due a refund would ultimately come down to when that income is realized.
Pomerleau also believes the proposal is constitutional given that distinction. “This is an income tax; this is a tax on gains, not a tax on assets,” he said.
Still, Pomerleau is skeptical that a bill including the tax would reach a hypothetical President Harris’s desk. “Aggressive new taxes on capital are unlikely to make it through Congress,” he said, pointing to failed attempts to reform stepped-up basis on capital gains at death during negotiations over the Inflation Reduction Act.