New Capital Gains Proposal Would Fleece The Middle Class

Sadly, trillion dollar deficits are the new normal in Washington, D.C., and politicians are willing to tax anything and everything to fund their reckless spending habits. Populist calls to “soak the rich” are as popular as ever, despite little evidence that even more progressive taxation would sustain federal coffers for long.

And now, President Joe Biden is calling for an unprecedented 20% minimum tax on unrealized capital gains for high-net-worth households. That’s right, the already overburdened Internal Revenue Service would be tasked with accurately calculating changes in the value of privately held companies and siphoning investments from these companies through a complicated maze of taxes. This would not only mean less money for hiring and workers’ raises, but also guarantee massive stock-selloffs at a time when millions of Americans are readying their retirement accounts. Instead of finding new ways to fleece the American people, the Biden administration should propose trimming the bloated budget.

Ordinary capital gains taxation is bad enough. A slew of public officials ranging from President John Kennedy to President Bill Clinton have recognized that punishing investment deters productive activity and rarely results in lasting revenues for Uncle Sam. But at least capital gains taxation is fairly straightforward to calculate. IRS bureaucrats need only know the investor’s income, size of the investment, initial purchase price, and selling price to figure out the tax owed. But, if tax-hungry politicians get their way, the IRS will have to divine the constantly evolving value of intellectual property, reputational capital, etc. for privately held companies with little market data to rely on.

This would likely result in protracted battles between wealthy investors and the IRS over the value of unrealized gains, with the IRS continually trying to high-ball gains to maximize tax revenues. The IRS winning these battles would mean resources taken from hiring initiatives, training programs, and worker compensation across the struggling economy. The impact over the first couple of years of implementation would be particularly rough, owing to the particularly poor design of the proposal. As Manhattan Institute senior fellow Brian Riedl notes, “the proposal would be retroactive. So someone who started a $1 billion private business 30 years ago could conceivably get a $200 million tax bill in the first year. The business owner would have to either sell the business, or be assessed additional fees to defer the taxes until whenever they wish to sell the business.”

It gets even worse. Business leaders hold significant sums in publicly traded stocks, and usually only sell these shares in significant sums to pay tax bills. The front-loaded, retroactive nature of the law would mean that these sell-offs would be concentrated in the near-future, and stocks would likely take a large tumble as a result. The main casualties of these large share-price declines would be the millions of Americans owning retirement accounts invested in the stock market. And nearly 60% of Americans report owning stock. A large proportion of these investors are far from wealthy. When Elon Musk’s stock sales caused Tesla shares to fall by 15%, ordinary investors felt far more pain than Musk.

Such is the folly of populist tax proposals. Despite the best intentions, policymakers usually succeed only in making it more difficult for middle-class Americans to save for their retirements. And, for all the pain and wage and hiring freezes, the proposal would net just $36 billion per year under the rosiest of assumptions. So much for financing trillion-dollar deficits with a “fair” tax system.

Biden, his administration, and his congressional allies need to make a concerted push to phase out deficit spending and get America back into the black. Real deficit reduction, not tired tax schemes, is the key to renewed prosperity.

David Williams is the president of the Taxpayers Protection Alliance.