We’ve had runaway government borrowing and spending, plus money-printing by the Fed, for the past two years. Now we have runaway inflation, which has led to some eye-popping asset prices and a government eager to collect a share of these assets even before they’re sold (“unrealized gains”). See “Biden to Include Minimum Tax on Billionaires in Budget Proposal” (NYT, 3/26/2022):
The tax would require that American households worth more than $100 million pay a rate of at least 20 percent on their income as well as unrealized gains in the value of their liquid assets, such as stocks and bonds, which can accumulate value for years but are taxed only when they are sold.
Legal questions about such a tax also abound, particularly whether a tax on wealth — rather than income — is constitutional. If Congress approves a wealth tax, there has been speculation that wealthy Americans could mount a legal challenge to the effort.
Due to the threshold of $100 million in assets, I’m a huge supporter of this bill! (though I’m concerned that it won’t be long before either the threshold is reduced or $100 million is the price of a Diet Coke). But it makes me wonder about whether the whole framework of capital gains is Constitutional.
Let’s ignore the mechanics of taxing someone on gains that exist only on paper and just focus on traditional capital gains taxes on realized gains (i.e., money received after an asset sale). The government is mostly in charge of what happens to the value of money because the government can decide interest rates, money printing rates, and how much the government will borrow and spend. The Sixteenth Amendment gives the government the power to tax incomes:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
But it isn’t income when an asset goes up hugely in nominal dollars because dollars have been devalued by the government’s actions. This has been mostly ignored in U.S. history because mostly inflation hasn’t been too extreme (though, of course, for long-held assets, the cumulative effect could still be dramatic). Consider a person who hits 70 and sells some stocks purchased in 1972 to fund retirement. Let’s suppose that these shares were purchased for $10,000 in 1972 and sold for $65,000 today. According to the government’s own CPI calculator, the investor suffered a loss, not a gain, on these shares (no income). Yet, if he/she/ze/they lives in California, more than $20,000 in tax could be owed (20 percent federal long-term capital gains, 3.8 percent Obamacare federal tax, 13.3 percent state tax).
How has the current system persisted for so long without a serious Constitutional challenge?
Related:
- “It’s Time to Stop Taxing Inflation and Start Indexing Capital Gains” (Heritage, 3/10/2022): Even if the U.S. indexed for inflation, its level of capital gains taxation would remain high by international standards.
- “Getting “Real” by Indexing Capital Gains for Inflation” (Tax Foundation, 3/6/2018): Inflation is low today, but that may not always be the case. Indexing provides important protection for all citizens, even those who have no capital gains, by reducing government’s ability and incentive to raise effective tax rates by inflating the currency.
None of capital tax is constitutional. Legally it would require constitutional amendment to make it a law. If it passes we need to start creating “Bill of Peonage” addition to US Constitution. Because at this inflation rate $100,000,000 soon will become household #.
Yes, this is blatantly unconstitutional, but the Supreme Court has okayed worse things before, so I wouldn’t necessarily count on this to stop them.
ScarletNumber, 16th Amendment was needed to introduce Income tax which painted as tax the super-rich and corporations scheme that will lower unpopular tariffs. We know how this played out but it passed the Senate (77-0) and the House (318-14) and was ratified by 43 states out of 49 in 1913.
How do you think Supreme Court can rule for assets tax? Declare it a form of death tax and prorate it annually till age of average American lifespan for life expectancy at current taxpayer age? And say “we are not economists”, “tax is good”, “roses are red and violets are blue and we will tax you”?.
My take on that this capital tax has zero chance of becoming reality for a very simple reason: it will royally piss off the oligarchs – i.e. the main donors of the Democrat party.
Depends on what the word “income” means in the 16th Amendment, i.e., how the courts have defined that word. Likely that the answer is out there for those who want to look, but unlikely that it has been defined as real dollars. Seems though that the 16th Amendment would not permit a wealth tax since it would seem a stretch to define wealth as income.
Jack, let’s not to go into newspeak territory. There is no difference between family farm appreciation and $150,000,000 valued private business appreciation. Soon family farms will push close to $100,000,000 threshold. Not that 16th amendment allows for any threshold.
Either the broker would have to provide taxable amounts adjusted for inflation or the investor would have to look them up for every position. 2 positions with the same gains but over different times would have 2 different taxes. They would be based on the government’s bullshit inflation index anyways.
My conclusion from reading the scant instructions for computing capital gains tax is hardly anyone pays them & most Amerkans want a simpler tax form. Not enough people owe capital gains tax for the IRS to bother putting in a space on the 1040 to declare your capital gains. Most of the capital gains are in primary residences & retirement accounts.