There are several reports out today about Kamala Harris's stand on taxes, though I'm not quite sure why. They're apparently based on vague statements from the campaign that Harris supports Joe Biden's tax proposals from several months ago, but there have been no firm details about this.
Nonetheless, two of Biden's proposals have been making the rounds:
- Above income of $4000,000: Increase the net investment income tax from 3.8% to 5%.
- Above net worth of $100 million: Minimum tax rate of 25%, including unrealized capital gains.
I'm not a big fan of taxing unrealized capital gains because I think you can accomplish much the same thing with ordinary targeted income taxes. That said, this would affect, at most, about 0.004% of Americans. It's not something for us ordinary schlubs to worry about.
The NIIT increase is small and applies to roughly the top 1% of earners. It's a fairly meat-and-potatoes way of raising taxes on the affluent and rich.
We don't know for sure if Harris supports these specific taxes, and there are other tax proposals in Biden's FY25 budget document. But this is what people are talking about. Just so you know.
Slightly higher taxes on the superrich? Bolshevism, I say! Sheer Bolshevism!
oh noes! she might lose the seven votes of the 'no labels' board of directors!
All presidents tax plans are dead on arrival in the senate if not supported by 60+1votes.
Budget Reconciliation?
Don't know how you tax unrealized cap gains unless you are trading securities and use mark to market accounting. Sounds messy to me, but the folks who have a net worth of over $100MM (how is that defined?) can afford to call H&R Block for advice (joke obviously).
Probably DOA.
The simplest way to tax unrealized capital gains is to tax them when the person dies. Right now those unrealized gains never get taxed and the heirs get to "step up" the tax basis. Mark to market on that date of death and tax the estate.
There are still a lot of assets, such as privately held businesses, that are very difficult to mark-to-market. Eliminating the step up is a better idea than taxing unrealized gains.
From what I understand, many ultra-rich people just let their portfolios sit untouched while gaining in unrealized value, and live off loans secured by those portfolios. The interest on the loans is tax-deductible. The result is near-zero taxable income and a wealthy life-style. The IRS gets nothing. I suspect that a tax on unrealized gains would effectively limit this type of scheme.
It would also help to put a cap on how much loan interest can be deducted, or eliminate the deduction entirely.
Loan interest is not deductible unless it's mortgage interest (capped) or a business expense (entirely possible with a clever accountant).
Correct. The tax advantage comes from the loans not being considered income.
This. Planet Money did a whole episode on the tax loophole that let's the rich live like this.
I've heard this before, but it doesn't make any sense. Explain to me how this works. If you take a loan you have to make payments. Loans accrue interest and require regular payments which, in turn, requires income to make the payments. That income generates tax liability. How is there a net gain here?
It's easiest to see this if we put some numbers to the situation. Suppose, for the sake of round numbers, you have $1 million in investments as collateral. No one is going to give you a $1 million loan - too risky. Maybe you can get 70% loan-to-value, giving you a $700k loan. Given the high risk factor, interest is going to be well above prime - say 7% in the current environment, which comes to $49k/year in interest, plus principle. For a 20 year loan, yearly payments come to $65,125. Where does this $65k come from? If your $1 million investment also generates a 7% return, that comes to $70k/year, but that income is taxable. If you're paying a marginal rate of 37%, you're only realizing $44k/year, net, and even less if you live in a state with an income tax. Where does the remaining $21k/year come from that you need to make the loan payments? Even if the income is taxed at the capital gains rate it's still not enough to make the payments. Also, interest is not tax deductible unless it's mortgage interest on your primary residence, which is capped, and if that's the case, the property isn't generating any income at all. You can try to pretend it's a business loan, but that's kind of dicey if you're trying to live on the money, even if you have a good accountant.
Someone explain to me how this works. I'm not seeing it.
Someone explain to me how this works. I'm not seeing it.
It's very simple. If you sell an asset to finance your lifestyle, that's considered income, and you're taxed on it. If you take out a loan, that's not income, and you pay no taxes on it.
There are multiple ways to try to deal with this. All of them are less than ideal. But we need to implement at least one of them.
Except that the loan has to be repaid, which requires income. With interest, the total of payments is much more than the loan. Thus, your total taxable income required to service the loan is much more than if you'd just sold the assets in the first place.
Not really. Deferring the taxes for decades is valuable, too. I'd bet that, in many cases, it exceeds the cost of interest. And, if the loan is supposed to be paid after death, you can structure it such that the basis step-up happens before anything needs to be sold, thus avoiding all capital gains taxes on the money.
Thanks for the explanation. I find this stuff fascinating, even if I’ll never be rich.
Taxes on the rich need to be way higher, and the reason they need to be way higher is because high inequality is socially toxic and promotes corruption and bad behavior. People who have too much money can get away with things they shouldn't, and can easily afford to corrupt public officials. When taxes are low, people can raise their social status through rapacious greed that increases their wealth even while damaging their reputation; when taxes are high, raising one's social status by cultivating a good reputation works better than buckraking. Incentives matter, and the incentives created by low taxes on the rich are perverse and bad.
Government revenue is nice, but it's not the main reason to do this. The main reason is to create a better society by giving the rich better incentives to behave.
I hate these complicated, backdoor schemes to raise taxes on the highest incomes. The simplest way to raise taxes on high incomes is... to raise tax rates on high incomes. Why make this complicated? All income above $1 million should be taxed at 50% or higher. Add in another higher rate at $10 million.
See above - the rich get basically interest-free loans on their stock wealth and live "income" (thus tax) free.
That income they used to invest has already been taxed. So what if they have saved enough to live off of? Isn't that everyone's goal? The American dream? Why would the income be taxed twice?
To curb their power to hurt other people.
Because it's not being taxed twice. The capital gains is entirely new income.
Sure. But Harris and commentators here were talking about taxing unrealized gains. It's not income if the asset hasn't been sold. Raising taxes on capital gains is one thing. Taxing unrealized gains, which we have not previously done, would be a major shift. We don't tax wealth, we tax income.
If you're doing your bookkeeping properly, unrealized capital gains will show up as increased wealth. If at the end of last year, you had $10 million worth of assets and this year you have $11 million worth of assets without buying or selling any assets, then you've made $1 million during the year. The fact that you have not chosen to convert any of it into cash is your choice and shouldn't be relevant to the tax man.
A wealth tax is a different animal. What is proposed here is to tax income, not wealth. The money used to invest is not touched by income tax, only the return on the investment.
Taxing unrealized capital gains at 25% seems designed to force sale.
Currently, unrealized capital gains can be passed from generation to generation without ever being taxed. They're unrealized when a person dies (no tax) and the heirs get to "step up" the tax basis. (Gee, I wonder who could have been responsible for designing such a system?)
So, either:
A) you agree with this system, or
B) feel free to suggest your own solution. I've offered mine above.
I don't know about design but if my few rental houses were subject to a capital gains tax now I would sell in a minute. I'm only hanging on to leave my heirs a somewhat greater share. I expect the tax to be about 25 % right now if it's 15% federal and up to 13.3% California.
Taxing unrealized capital gains is a terrible idea. As danove points out, this would crush a lot of people who have appreciating assets that don't spin off a lot of cash flow. It's also very hard to calculate the gains on many assets. You'd end up making the tax code even more complicated and filled with even more loopholes. It would also put tax revenues on a roller coaster, with enormous tax collections in good years, and then years in which there are little or no capital gains to tax.
Instead, tax capital gains at exactly the same rate as ordinary income. Income is income. Eliminate the step-up basis when passing assets to heirs. Implement one of the suboptimal ways to close the loophole of taking out a loan secured by assets. My choice would be that unrealized capital gains get taxed any time they are used as collateral for a loan, using the loan amount as the basis.
so, eliminate loopholes, including the one that makes living off loan receipts feasible.
Valid suggestions - notably the loan although this would need very careful tailoring.
Definition of Long-Term in US code is frankly absurd: https://www.irs.gov/taxtopics/tc409
"Short-term or long-term
To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For exceptions to this rule, such as property acquired by gift, property acquired from a decedent, or patent property, refer to Publication 544, Sales and Other Dispositions of Assets; for commodity futures, see Publication 550, Investment Income and Expenses; or for applicable partnership interests, see Publication 541, Partnerships. To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset."
Given advantage to long-term capital gain if long-term is defined in a fashion that is truly long-term (as aligned e.g. to infrastructure investment, to have an eye on the needs for renewable energy and massive infrastructure upgrade), in years terms would be properly useful economically.
Why such a low rate?
So, would taxing the unrealized capital gain reset the cost basis when later sold?
Yes. Basically, no more than the most recent year's gains or losses would ever be taxed at one time.
Sadly this is all just signaling. Even if Harris wins, it is very likely to be a GOP led Senate, let alone the 60 vote Senate needed to pass tax increases. Further, the tax on unrealized gains would likely face a challenge in the current Supreme Court.
For me, a more interesting question would be Harris' position on the. so called, Trump tax cuts: they come due during the next President's term. Would she renew any of them? Which ones? Before one laughs at this, raising corporate tax rates is far from a given or easy...
Reconciliation doesn't need 60 votes. And Congress has constitutionally a pretty much free hand over taxes. There is no conceivable basis for anyone to challenge an increase in an existing tax or a broadening of the income subject to that tax.
FrankM - a few points
1. We have a tied Senate today. West Virginia is almost certain to go red in the next election. Further, Tester is in for a difficult election. Where are the Democrats picking up a Senate seat?
2. True a tax increase could, not to exceed ten years, be passed by reconciliation. As discussed above, the Democrats would need some Republican votes, even under reconciliation.
3. Unrealized gains being taxable is definitely subject to a Supreme Court review. Thus, I disagree with "There is no conceivable basis for anyone to challenge an increase in an existing tax or a broadening of the income subject to that tax."
"phrasing" is all too important here.
Rollback the Trump and Bush Era tax cuts. Budget problems are solved, so long as both parties exercise some form of fiscal restraint - which is key.
Starve the beast is a Nordquist term for cutting the federal budget except for defense. considering how badly the Soviet Union is doing against Ukraine, the Republicans will be hard pressed to paint Putin as anything but a paper tiger
The news media is attempting to bait Kamala Harris into doing interviews by making rampant speculation about her policy. They insist she has to do interviews. She's kind of busy, though. Even during the convention, she's out doing rallies.
But why does she have to do interviews?
Almost all of us are voting for her, period. The Never-Trumpers aren't going to change their minds. The undecided can tune into the debate to hear her in an adversarial arena.
The only people who want her to do interviews are those who hope and pray for a gotcha moment -- the news media and the Trump campaign.
If the fourth estate wants to make shit up, that shame falls solely on them.
Exactly right. This is the most policy-irrelevant election I've seen in my lifetime. It's about one thing: DJT. Whatever issue is in second place is not even within shouting distance. Harris just needs to keep her supporters motivated.
Taxing unrealised gains is rather bad policy and bad economics (the whole key being unrealised).
Rather better to
A. Tax intergenerational wealth (inheritance) - where notably closing leakage is important (e.g. in Anglo world, games with trusts). There are many many good economic policy reasons, of which the corrosive effects of wealth concentration which no proper free market supporter (as opposed to Oligarch) should support
B. Income of course.
C. Short-term realised capital gains, no reason to treat this advantageously (and long-term should be defined in fashion that is properly long).
For a long time, I've been arguing for a stiff tax rate for everyone (one rate), but with a very large deduction for Cost-Of-Living which everyone gets. The net effect would be a reasonable tax for most people, and the high rate hitting the very rich harder. Along with that, a lower rate for businesses would (hopefully) push everyone to leave profits in companies to work, rather than extracting it for personal gain. Thus, a personal tax rate of perhaps 35% and business rate of 25% might be good.
The difficult part has been the super-rich who borrow, based on their unrealized-gain valuable stocks, to live off borrowed and untaxed money. How can you ensure they're paying "their fair share".
Similarly, I favor that kind of taxing of inherited estates. The super-rich and their children may not appreciate the importance of inheritance taxes, but when that is combined with the low personal rates that Reagan Republicans handed out, we end with a major Class problem. The rich are out of touch with the 99% of Americans who do all the physical work.
Why do I think this is good? One tax rate for all U.S. citizens is Equality under the Law (same for one personal deduction). I favor a lower rate for business (though not zero) because we want businesses to be successful, not to be a bank for the rich to hide money. They provide us with things we need, they employ people, and they are the engine of our Capitalist system.
Why the large COLA personal deduction? Because businesses can write-off their cost of doing business, and individuals deserve as much as that.
It is the super-rich and the not-so-super-rich that are the problem. Kill 'em off and you've killed off both a large percentage of our domestic troubles and the trouble-makers as well.
You're not proposing a single tax rate, you're proposing two tax rates, zero for anybody under the exemption amount and "stiff" above that.
The common Dem proposal to raise rates on only the super rich is flawed because long ago wealthy corporations and individuals lobbied the best congress money can buy, and received their tax “exemptions”. So when their new tax bill comes, they apply their exemption and they’re back to a single digit (or zero) tax bracket. Just ask Warren Buffet or Jack Abramoff.
When the super rich dodge taxes, as do the super poor, guess who has to pay the tab? So sadly the Dems do in fact raise taxes on the middle class, and FOX will be sure to let everyone know come election time.
If they start taxing us on unrealized gains I assume we would also get refunds on unrealized losses?
I would certainly expect you could claim deductions from unrealized losses.
Beware of GOP tax cuts bearing gifts.
In spite of fact checkers showing the GOP never said they would cut social security or medicare, keep in mind their ongoing backdoor strategy to "Starve the Beast". They never have to actually say they will cut these programs, but by cutting and/or never raising taxes, reduced revenue for will inevitably require benefit cuts.
Except of course for DoD, which will never get cuts because GOP will start a war to keep us safe. Just one more surge and we'll find those WMDs.