Bohanon & Curott: Let’s hope unrealized capital gains tax is never reality

We hope Sen. Ron Wyden’s unrealized capital gains proposal never sees the light of day. As the law currently stands, when an individual buys an asset that appreciates, a capital gains tax is assessed when the asset is sold. Wyden’s proposal would require those with over $1 billion in assets or three straight years of income over $100 million to pay taxes based on unrealized gains.

We’re sure Wyden and the other progressives will assure us they are only proposing going after billionaires and other fat cats who are able to pay. This reminds us of warlords of Central Asia or bank robbers of the U.S. Great Depression who assured us they would loot only from those rich folks we all rightfully resent, anyway. Right—and the federal income tax was never going to be above 2%. The proposed unrealized capital gains tax is a policy more befitting a fly-by-night dictatorship than a liberal democracy with a rule of law.

An unrealized capital gains tax would create wild uncertainty that would undermine entrepreneurship and productive investment. Unrealized gains constantly go up and down on paper with market conditions. Assessing taxes on these paper profits would create unpredictable and volatile swings in tax obligations from year to year, as well as create other perverse incentives to stay under the triggering threshold.

Discontent with merely taxing incomes, progressive politicians are desperately scheming to appropriate the accumulated savings of Americans to fund their massive spending proposals. They want to start with billionaires. But once they create a wedge into tapping the nation’s capital stock, it is only a matter of time before they lower the thresholds and raise the rates.

With an unrealized capital gains tax on the books, large portions of the wealth of millions of Americans could be taken at the drop of a hat by the government. This is a radical departure from the current tax system, and it would create uncertainty about the rules under which economic activity takes place. Such regime uncertainty would discourage capital investment and innovation, hampering economic growth and reducing the standard of living for everyone.

The slowdown in the rate of economic growth over the last decade is one of the most pressing concerns facing our nation. Politicians urgently need to be looking for ways to encourage a more rapid rate of economic growth, not slow it more.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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5 thoughts on “Bohanon & Curott: Let’s hope unrealized capital gains tax is never reality

  1. It’s a real stretch to compare taxing unrealized gains for the 700 wealthiest US families to bank robbers or warlords of Central Asia. And the “slippery slope” argument can be used against any policy. A key reason for this approach is that it clamps down on assets that aren’t normally taxed, and which the super wealthy often borrow against to support their lifestyles. Then the gains are not taxed when they die (buy, borrow and die strategy). But this new tax would be complex, possibly disruptive and, at times, unfair.

    I wonder if it would be better if we taxed unrealized gains when folks die?

  2. Couldn’t agree with the authors more. The investor class should absolutely be shielded from all taxes on their assets. If they’re not, how will their wealth ever trickle down to a wage slave like me?

  3. You think accountants were good at their jobs before, watch how good they will get if the tax sees the light of day. Let’s just keep taking away the incentives to start and grow a company that could employ hundred of people.

  4. I am wondering if there is not some real merit to this idea and not only at the top. There has to be something really broken in our tax laws to allow so many people to purchase real estate and then sit on it for years at a time while it is vacant. I have seen properties purchased, the building sit until it is demolished, and then still sit for scores more years contributing almost nothing to the local tax base.

    I would like them to explain the differences in US tax laws vs most other European and Scandinavian countries that allows this kind of waste of resources and warehousing of wealth (or write-offs) to happen, and then explain why or why not taxing unrealized gains is a bad idea.

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