Under the new proposal, people with a net worth of more than $100 million would have to pay a minimum effective tax rate of 25 percent.
WASHINGTON—As part of her campaign platform, Vice President Kamala Harris has advocated a tax on unrealized capital gains from assets such as stocks and bonds. The proposal, although not new, has faced opposition from both sides of the aisle, with some critics questioning its constitutionality.
Harris, the Democratic presidential nominee, has backed President Joe Biden’s tax increases outlined in the fiscal year 2025 budget proposal, which includes a plan to tax unrealized capital gains of individuals with net wealth above $100 million.
Many believe the proposal has little chance of passing Congress.
“It’s very complicated. It needs a lot of details to work properly,” Garrett Watson, a senior policy analyst at the Tax Foundation, said.
Chief among them, he told The Epoch Times, is dealing with illiquid assets, or assets that are hard to value, such as private businesses.
The IRS would have to deal with valuations, he noted, to ensure that the tax is correctly calculated and paid.
Another problem is that the government has to provide credit for any losses investors face. That’s also in the proposal.
“In a downturn, when gains turn into losses, the government has to actually provide refunds back to these folks—write checks back to billionaires,” Watson said.
“That doesn’t seem optically great.”
Harris has said her policies will help build what she describes as an “opportunity economy” for middle-class Americans.
Typically, investors do not have to pay taxes on gains made on stocks and other assets, such as private businesses, until they are sold and realized.
Harris and other advocates of the plan say that unrealized gains should be taxed sooner because investors do not pay taxes until the asset is sold. In addition, when the investor dies, a tax provision known as “step-up in basis” allows heirs to avoid or minimize tax on an inherited asset by adjusting its worth to its fair market value.
Institute on Taxation and Economic Policy (ITEP), a left-leaning think tank, defended the proposal to tax unrealized capital gains, stating that it will limit a huge tax break for wealthy Americans.
“By not taxing unrealized capital gains, our tax code is more lenient on extremely wealthy people who are more likely to have this type of income than most of us who pay taxes on income from work as we earn it,” Steve Wamhoff, federal policy director at ITEP, wrote in a blog last year.
Capital Gains Debate
Former President Donald Trump, the Republican presidential nominee, criticized Harris’s plan during a town hall with Fox News host Sean Hannity on Sept. 4.
“If that’s going to happen, go out and open an appraisal company, because you’re going to make a fortune,” Trump said.
According to the plan, capital gains would include any increase in a private business’s value. If a business appreciates, the owner will incur unrealized gains that would be subject to taxation.
Many critics, including Trump, contend that wealthy business owners might have to sell their companies or assets to pay taxes if they lack the funds to do so.
“And remember this: Very rich people and big international corporations, they don’t have to stay in the United States, and they will be forced to leave for other countries,” Trump said.
The Biden administration says the tax will only apply to a small percentage of the population.
Some have expressed concerns that if the plan passes Congress, there may be a temptation to expand the tax to a larger group in the future under different administrations.
“Harris’s proposal to tax unrealized gains may appear to target only the wealthiest Americans, but it sets a dangerous precedent that would pave the way for even more aggressive and economically damaging tax increases,” Adam Michel, director of tax policy studies at the Cato Institute, wrote in a recent report.
“This tax is not just an attack on the wealthy; it’s an assault on investment, innovation, and economic growth, risking widespread economic damage that will be felt across the entire economy.”
Definition of Income
According to advocates of the new tax plan, the definition of income should include a taxpayer’s annual change in net worth, meaning wages plus any increase or decrease in asset value.
Under the new proposal, people with net worths of more than $100 million would have to pay a minimum effective tax rate of 25 percent on incomes that also include their unrealized capital gains.
“Taxpayers would calculate their effective tax rate for the minimum tax and, if it fell below 25 percent, would owe additional taxes to bring their effective rate to 25 percent,” according to a recent note by the Tax Foundation. “Any additional taxes owed because of the minimum tax would be payable over nine years initially, and over five years going forward.”
In other words, even if they don’t sell the assets, wealthy taxpayers would still owe taxes on capital gains each year.
Sen. Mike Lee (R-Utah) challenged the constitutionality of the plan.
“How would an unrealized capital gains tax be constitutional? If it’s truly ‘unrealized,’ you can’t treat it as income,” he wrote on social media platform X on April 25.
“And because it’s not apportioned, you can’t treat it as a direct, non-income tax.”
Supporters of the plan, however, dismiss these criticisms, comparing the new tax to property taxes, which already account for value increases.
“I think that this reaction to unrealized gains is a little funny, given that I bet that the majority of people watching right now are already paying a tax on unrealized gains. It’s called a property tax,” Bharat Ramamurti, former National Economic Council deputy director under President Biden and economic adviser to the Harris campaign, told CNBC on Aug. 28.
“When the value of your home goes up, you pay higher taxes, even if you don’t sell your home.”
Rep. Ro Khanna (D-Calif.), a Harris campaign surrogate, however, disagrees with Biden and Harris on this issue, stating that the policy would discourage investment in startups.
“This is not the right way to do it,” the progressive congressman, who represents a district located in the heart of Silicon Valley, told CNBC on Sept. 4.
“Let’s say you’re an entrepreneur. You create a company, it gets to $100 million or $200 million on paper. Now if you’re taxing that, you’re probably going to force that person to sell it,” Khanna said.
“Do you really want the entrepreneurs to be forced to sell their companies to larger institutions and to decline in value? I just don’t think that’s what you want for a startup ecosystem.”
Father-Son Feud
In 2021, Senate Finance Committee Chairman Sen. Ron Wyden (D-Ore.) first floated the proposal to tax unrealized capital gains, targeting wealthy people with assets of more than $1 billion and those with incomes of $100 million or more for three consecutive years.
Congress debated the idea in 2022. But Sen. Joe Manchin (D-W.Va.), who opposed the plan, ultimately helped kill the proposal.
Wyden introduced the legislation again in 2023 together with 15 co-sponsors. President Biden also included a version of the plan in his latest budget.
When Sen. Wyden first introduced the idea, many investors, including his son Adam Wyden, the owner of a hedge fund in Florida, criticized him.
During an interview with CNBC in 2021, Adam Wyden said, “It’s clear to me that the people that are making these policy decisions have never experienced the ups and downs of running a business.”
According to Watson, investors’ discontent stems from the fact that the United States has one of the world’s strongest and deepest capital markets.
“We need to be careful about unprecedented, untested policy changes that could compromise that or weaken that source of capital,” he said.
Harris Breaks From Biden
On Sept. 4, Harris proposed a new capital gains tax rate of 28 percent, which is greater than the current rate but lower than Biden’s 2025 budget proposal, which she previously supported.
Harris’s plan is a departure from Biden’s budget proposal, which would raise the capital gains tax on individuals earning more than $1 million to 44.6 percent.
When it comes to taxing unrealized capital gains, however, Harris hasn’t indicated that she plans to back down from the proposal.
Recently, she also unveiled other economic policy goals, including an increase in the tax deduction for startup costs from $5,000 to $50,000.
So far, Harris hasn’t said whether or not she wants to keep the tax cuts that will expire next year.
The Tax Foundation estimated that 62 percent of households would see a tax increase in 2026 if certain provisions of the Tax Cuts and Jobs Act were allowed to expire next year.
“There’s a big incentive by both parties to deal with this,” Watson said.
However, there’s a revenue tradeoff that presents a big challenge for politicians, he noted, as it will reduce federal revenues by more than $4 trillion over 10 years.