You have to hand it to the leftists: They never give up. Despite the demise of President Biden’s Build Back Better plan — along with its wealth-tax proposal — the administration is back again with yet another idea for taxing wealth. They’ve just given it a new name.
The Treasury Department recently released its explanation of the administration’s FY 2023 revenue proposals. The so-called Green Book lays out exactly how the administration proposes to raise $1.628 billion in new taxes over the next ten years. In addition to raising the corporate-tax rate to 28 percent and pushing the top personal income-tax rate to 39.5 percent, the proposal creates what effectively amounts to a wealth tax. Treasury claims that the new tax will raise $239.5 billion in revenue over the next decade.
The fact that the last wealth-tax proposal went down in flames is not a deterrent to leftist policy-makers. Rather than revisiting the merits of such a play, they’ve merely changed the branding. Instead, what we now have before us is referred to as a “minimum income tax” to be imposed on the richest Americans.
How It Works
The “minimum income tax” is not really an income tax at all because it reaches well beyond the traditional definition of “income” as used in the tax code since 1913. This new tax will be imposed at the rate of 20 percent on all “taxable income and ordinary assets,” including unrealized capital gains. This amounts to an estate tax, but the Biden administration doesn’t have the patience to wait until you’re dead to assess it.
By taxing unrealized capital gains, the Biden administration intends to tax mere paper increases in asset value, even if those increases are not locked in by the sale of the asset. For example, suppose you own stock in XYZ Corp, which you purchased at $10 per share. Say the stock value increased to $12 per share. You then have a $2 per share “unrealized” capital gain. It’s unrealized because the gain is not locked in until you sell the stock. That is, you have no money — and hence no income — until the stock is sold.
Paper gains — and losses, for that matter — are a mere economic fantasy because, as we all know, stocks can either rise or crash at any time. The gain is simply not real until the asset is sold, and that is the point at which the gain is taxed. To tax unrealized gains would be to base our tax system on the arbitrary whims of the market that changes day by day — or, in many cases, minute by minute.
The tax would apply to “all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) greater than $100 million” and would be imposed at the rate of 20 percent of the increased fair market value of one’s holdings over the course of the year. Asset values will be fixed as of December 31.
Now that they’re intending to tax unrealized capital gains, the obvious next question is: What will happen to capital losses? The answer is that unrealized capital losses will be subject to the same rules that currently exist. That means such losses are limited — with certain exceptions — to $3,000 per year.
So get this: If you have unrealized paper gains in your portfolio of $100,000, you pay a tax of $20,000. If you have unrealized paper losses of $100,000, you get to write off $3,000.
A Compliance Nightmare
Those subject to the tax must submit a detailed financial statement to the IRS annually, which must disclose each asset owned, listed separately by asset class. Privacy is another casualty of this proposal, a prospect made worse by recent leaks of information from the IRS, not to mention potential hacks to its data systems. The statement must also show the total estimated value of each asset and all liabilities as of December 31. The difference between the two constitutes the taxpayer’s “wealth” for purposes of the tax. (Recall that the tax applies to those whose wealth exceeds $100 million.)
Publicly traded assets, such as listed stocks, bonds, mutual funds and the like would have to be reported at their fair market values as of the end of the year.
Assets that are not publicly traded — say, ownership interests in real estate, closely held, privately owned businesses, and other assets not subject to public valuations — would be subject to different rules. Such assets would be valued using the greater of: (1) the original or adjusted cost basis; (2) the last valuation derived through investment, borrowing, or other financial statements; or (3) such other methods as are approved by the IRS.
If the taxpayer does not obtain an appraisal of all non-tradable assets every year, a default valuation process kicks in. Under that scheme, the IRS will automatically assume a value increase equal to the five-year Treasury rate plus two percentage points.
The arbitrary valuation of non-tradable assets promises a compliance nightmare. The true fair market value of a non-publicly traded asset can be determined only by what a fully informed buyer is willing to pay a willing seller. How much is your house worth? Regardless of what Zillow might speculate, what the county assessor claims, or what you might hope to fetch, the only way to ascertain the true value is when an able buyer steps forward with an offer.
The Enforcement Quagmire
How will the IRS determine the accuracy of taxpayers’ claims regarding their non-tradable assets? It is this valuation question that controls every estate-tax audit undertaken by the IRS. In such cases, the IRS claims that the value of the decedent’s assets are much higher than claimed, and of course, demands a much higher estate tax. This routinely leads to protracted litigation and substantial costs (mostly to the estate) of proving the true value of the decedent’s assets.
As with nearly every other aspect of tax litigation, the burden of proof will be on the taxpayer. That means taxpayers will bear the costs of the appraisals necessary to defeat the IRS’s arbitrary asset valuations of a laundry list of assets.
In the meantime, the IRS will be faced with the assimilation, review, and analysis of potentially millions of individual assets. Since we are talking about the richest Americans, there is no telling how many asset classes and individual assets make up the pool of capital targeted by this tax.
And keep mind that updated reports will have to be filed every year under this proposal.
Not Just for Billionaires
The Biden administration touts this tax as a “billionaire’s tax,” though it clearly isn’t. Again, the tax kicks in for taxpayers whose wealth exceeds $100 million.
This is purely a class-warfare tactic. Consider the language that the administration is using to push the change. The Green Book states that “reforms to the taxation of capital gains will reduce economic disparities among Americans.” The administration’s press release on the proposal falsely claims that “a firefighter or teacher can pay double th[e] tax rate” of the wealthiest Americans. This statement is deliberately intended to inflame the passions and prejudices of the masses against the wealthy.
Simply put, the proposal’s aim is the redistribution of wealth and the destruction of private ownership of capital. It has nothing do to with sound tax policy or economic reasoning. In fact, the aim of taxing unrealized phantom gains makes it perfectly antithetical to sound tax policy. Let’s hope there are enough sober-minded people in Congress to reject this proposal as they did the last one.
Article posted with permission from Dan Pilla
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