The 19th Century German statesman Otto von Bismarck observed famously that “Politics is the art of the possible, the attainable – the art of the next best.” Sometimes, however, it’s not even the next best; it can be illogical, unworkable, and pie-in-the sky. Such is the nature of Oregon Democratic Sen. Ron Wyden’s tax proposal – which should be called the Wyden-Warren-Sanders’ Folly – to tax billionaires’ unrealized capital gains, such as stocks, valuable art works, or jewels, that appreciate in value with time. The gains are not “realized” until the item is sold.
This might be seductive to those who want “the rich to pay their fair share,” but it’s certainly not fair. It’s unwieldy and susceptible to manipulation, merely a wilted fig leaf to offer the illusion that President Joe Biden’s multi-trillion-dollar expenditures on social programs will be “paid for.” Ultimately, the expenditures will occur, but the revenues won’t materialize.
It’s one thing to tax income, which most Americans dislike but have gotten more or less used to, but taxing wealth in the form of unrealized capital gains is a horse of a different color – possibly literally.
What do I mean by that? Well, suppose you own a racehorse of not particularly distinguished lineage that you bought for, say, $50,000, and on a whim, you enter him in the Kentucky Derby and he wins it. Immediately, he could be worth $50 million, with stud fees in six figures. Under the Wyden-Warren-Sanders’ tax plan, you could have a huge tax bill for the horse (possibly, every year that you own him), because of his potential. But this could be finessed: You could reduce the tax due by (with a wink and a nod) selling the horse to a friend for a far lesser price, and have him sell the animal back to you, again on the cheap. In the face of actual sales transactions, who’s to say that the horse was undervalued?
Consider another example – the collectible, vintage cars that appeal to the very wealthy. 1930 Rolls-Royce Phantom IIs have commanded a huge spectrum of prices at auction – from $24,750 to $707,454. Who gets to decide what the “unrealized capital gain” on an owner’s Rolls is, at a given time? Will the IRS send an inspector to judge the condition of the car, to ascertain whether everything is original or has been updated (a no-no for vintage vehicles)? A similar situation pertains to vintage wines: Is there proof that they’ve been cellared properly? And therein lies another question: How would the IRS even know about a person’s wine, jewelry or art collection?
There’s also the issue of what to do about unrealized capital losses. Expensive assets can decrease in value, such as when Mark Zuckerberg’s Facebook stock or Elon Musk’s Tesla stock has a bad year, so that would need to be factored into billionaires’ tax burdens, and could result in the IRS issuing hefty refund checks to high-worth individuals.
Furthermore, we shouldn’t kid ourselves that once the tax man’s foot is in the billionaire’s door that he won’t eventually come for many of the rest of us. That’s where the real money is in this country, not in the jewelry boxes, art collections, garages, or businesses of billionaires. All of us who own a house or have a wisely invested retirement account have unrealized capital gains. Estimating tax liability on them would create problems and confusion galore.
Here’s my own real-world example: At the age of 9, I obtained an autograph, for free, from baseball legend Ty Cobb. According to recent auction sales, its value is in the range of $1,000 to $2,000, but I also have the postmarked envelope in which he sent it to me. That provenance probably increases the value, but who would get to judge what my unrealized capital gain is, and how? And would I have to sell the artifact to pay the tax on its worth, or raid my savings, since its value is not denominated in dollars until it is sold?
Finally, taxing unrealized gains may be unconstitutional. The Washington Post’s Henry Olsen has laid out the issue nicely:
The 16th Amendment authorizes taxation of ‘income,’ and the definition of that seemingly simple word has spawned a long history of complicated case law. Whether something is defined as income often has to do with whether a person has complete control over a source of money that can then be used in trade to purchase or invest as one sees fit. Unrealized gains don’t fit under that rubric because the wealth is on paper, not in the hands of the owner to use as she wants. In 1920, the Supreme Court ruled that stock dividends or splits can’t be taxed because they are not income. That is just one example of a torturous series of cases that the Supreme Court would inevitably have to consider to determine if Congress even has the power to tax unrealized gains.
Bottom line: If they’re going to increase taxes, congressional Democrats should dump the gimmick and be forthright. Who do they think they’re kidding?
Henry I. Miller, a physician and molecular biologist, is a senior fellow at the Pacific Research Institute.