Senator Wyden's Very Bad Idea for More Taxes
Oregon's liberal Democratic senator Ron Wyden most likely knew from the get-go that his idea for new taxes on assets and investments wouldn't get a lot of traction — so much so that a news release, tweet, or bulletin taking credit for his own proposal can't be found on the senator's official website.
Yet Senator Wyden, who is the ranking member of the Senate's Finance Committee, in early April told the financial press he is developing a "mark-to-market" approach to tax unrealized capital gains. In simple terms, he proposes a levy — a tax — on investments (like real estate or stocks) based on valuations of their holdings each year, with all annual gains treated like income — even gains that have not been realized. This "mark-to-market" accounting practice of updating the value of an asset would tax all capital gains like income at a maximum rate of 37 percent.
The present capital gains tax functions this way: when capital assets like stocks or real estate are bought, the purchase price becomes the "cost basis," and when they are sold, the difference between the cost basis and the sale price becomes a "capital gain." With a couple stipulations involving the length of time an asset is held (i.e., long- or short-term) and breakpoints based on a taxpayer's overall income, the current capital gains tax in the U.S. ranges between 15 percent and 23.8 percent. When an asset is sold for a profit after a year or more, it is taxed at long term rates, while rates if assets are sold after less than a year — i.e., short term — generally equate to ordinary income tax rates.
So what could possibly go wrong with systematic annual taxation that would be extraordinarily difficult and complex to implement, while loaded with potential to disrupt and devastate the nation's financial markets?
First and foremost: compliance and its associated costs. Would it even be humanly possible to annually value the wide array of capital assets that constitute our nation's economy? How do you go about fairly valuing — without transactions to price them — everything from venture capital to private debt to stock options to cyclical businesses to illiquid real estate and beyond?
Then, what kind of drain on the U.S. economy would such annual fiscal gymnastics impose, as everyone's asset and money managers maneuver to value assets, particularly illiquid ones, with the objective of tax efficiency? (Of course, Senator Wyden promises, but has not yet provided, a detailed explanation of exactly how all this will work.) Some, if not many, investors would just not bother and take their capital elsewhere.
Another problem: How would smaller investors — even otherwise moderately wealthy investors — pay taxes on investments that have not yet returned cash to them? Senator Wyden must know that Americans saving and investing for the future do not possess surpluses of cash in addition to those assets to pay additional taxes. The obvious is that only when a stock, real estate, or another asset is sold does an investor obtain the cash to monetize the gains of his investment. There is good reason why we presently tax only realized gains in America — and not notional ones — because one is a tangible gain, while the other is only an abstract number on paper until it is sold.
Senator Wyden, with a worldview common among liberal Democrats, further sees the issue in terms of binary economic and class distinctions. In announcing his proposal, he asserted:
There are two tax codes in America. The first is for nurses, police officers, and factory workers — those who earn wages and pay taxes with every paycheck. The second is for millionaires and billionaires — those who use their wealth to build more wealth, paying what they want, when they want ... Everyone needs to pay their fair share.
That statement by itself ignores the facts that the top one percent already pay a greater share of individual income taxes (37.3 percent) than the bottom 90 percent combined (30.5 percent), or that more Americans than ever own stocks and almost two thirds of Americans own their homes.
Additionally, many Americans are not rich and wealthy like Wyden's pejorative "millionaires and billionaires" and do not fit neatly into either group. They are America's so-called "middle class." Yes, they earn wages and pay taxes with every paycheck, but over time, they are fortunate enough to save some of the money the government has allowed them to keep. They go on to invest their dollars, sometimes well and other times not so well. Over the years, the growth and appreciation of those assets enable them to raise families, pay their bills, even enjoy life and increase their likelihood of making it through retirement without running out of money. Just where would an always benevolent federal government draw the line on who and what is taxed — and for how much?
Critics mostly agree that Wyden's proposal has little chance of passing any time soon, but it is a siren call to those lured by its potential to raise vast sums to feed the seemingly insatiable demands of government spending — funds that could otherwise remain available to taxpayers to circulate in the economy as they see fit.
Is it too much to expect the senior Democrat on the Senate's Finance Committee to understand that such a tax proposal disregards the lifeblood of our economy: investment? Senator Wyden's proposal, if implemented, would discourage capital formation, increased productivity, investment risk-taking, and wealth creation. Such an idea embodies an entire party's diametrically different political philosophy of wealth as a divisive political wedge and "millionaires and billionaires" as a populist foil instead of concentrating on growing the economy and creating jobs for the benefit of all Americans.
Maybe Vice President Mike Pence said it best with his remarks at CPAC, the annual conservative convention, in March: "The truth is, we [conservatives] want to make poor people richer; they [the Democrats] want to make rich people poorer." Senator Wyden's proposal is just a very bad idea that all Americans — regardless of their politics — could agree should never see the light of day.
Chris J. Krisinger (colonel, USAF ret.) served in policy advisory positions in both the Pentagon and the State Department. He was a National Defense Fellow at Harvard University.