
Sweeping Reform Would Tax Capital Gains Like Ordinary Income - pwg
https://itep.org/sweeping-reform-would-tax-capital-gains-like-ordinary-income/
======
tomp
Reading the title, this seems like an awesome proposal, but paying attention
to the details...

 _> tax the appreciation of assets owned by the very wealthy as income each
year, an approach known as mark-to-market taxation

> the proposal would be structured to affect only the richest 0.1 percent of
> Americans_

Yeah, it's almost certainly a terrible idea.

(1) Mark-to-market is terrible, unrealistic, and arbitrary. Imagine a 70 year
old grandma owning a house in SF... it's price rises 20% in a year, what is
she to do? She has no money... the only thing she can do is sell the house!
Even worse, what happens when there's a crisis, and house prices _fall_ 20%?
You lost more than you gained, and you _still_ owe last year's tax!

(2) _only top 0.1%_ and _like ordinary income_ is fundamentally incompatible -
I agree that capital gains should be taxed like income (and with the tax /
offshore assets reforms that the US has done in the past few years, it's
uniquely positioned among countries to _actually_ implement such tax), but I
see no reason why it shouldn't apply to _everybody_ (same as income tax).

~~~
asdf333
i understand your sentiment on the first but that’s what originally led to
proposition 13 and is responsible for a lot of housing and budget issues in
CA.

i am not saying mark to market makes sense but for this rule, if the grandma
is in the .1% her net worth is well north of 10m

i’m sure she will be able to afford the 20% increase

i’m not saying mark to market makes sense but your grandma example is not a
good counter example

~~~
gumby
Prop 13 caused lots of problems and also provided structural social benefits,
allowing people to stay in their homes.

Removing prop 13 from commercial buildings (nobody lives there) and removing
the socially corrosive ability to give it to your kids tax free would fix most
of the financial and social problems and preserve the best part.

~~~
sologoub
Or better yet, remove corporations from being eligible to enjoy prop. 13 all
together - whether commercial, industrial, farm or residential.

This would keep grandma in her home or farmstead, but prevent corps from
selling, but doing tax free exchanges and preserving the low tax base forever.

PS, mark-to-market is a terrible idea and these gains are not income for most
people until sold. We already have property taxes, we just need them to work.

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rm2889
Taxing unrealized capital gains? So someone like Bezos who's annual increase
in wealth is in the form of amazon stock, would have to sell that stock to
actually have the liquid cash to pay for this tax? Come tax season wouldn't it
lead to a bunch of founders having to flood the stock market with their stock,
hence a large decrease in the stock price and consequently lower taxable
amount? Hence a self defeating tax?

Then there's the inflation question. If CPI is 3%, and my capital gains
amounts to 6% of my portfolio, my real increase in wealth is only 3%. But I
pay tax on 6%?

~~~
burlesona
I’m not endorsing the idea, but just thinking about how it would play out...

I suspect that for the reasons you just gave, you’d see a quick transition in
the marketplace where companies stopped paying high-end roles largely via
stock, and founders like Bezos greatly reduced their personal holdings.

If they’re trying to target only the top 0.1% it would probably have some
floor like the first $1M per year that is exempt.

But yeah this would seem like it would very much punish concentrated ownership
of large companies.

In reality though it would probably ha e some stupid loophole like it only
applies to individuals so then people could avoid it by transferring their
stock to intermediate LLCs or something.

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chiefalchemist
Feels doubtful (to the point I can't take it seriously).

That said, revenue is half the problem. Excessive spending and waste is the
other half. Raising taxes to give mindless politicians more fuel for their
boundless spending fire...what can go wrong?

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VonGuard
I mean, great, but the GOP will never let this happen. the Senate will kill
this before it even gets to committee, let alone a floor vote.

~~~
rileymat2
I am not sure I support taxing capital gains as ordinary income unless there
is some way to adjust the gains for inflation.

For instance, if your capital gains tracked inflation precisely it seems
fundamentally unfair to tax a percentage of the gains, as the person has not
really "gained" in real terms.

~~~
jdavis703
It looks like this plan would only apply to a fraction of the economic top 1%.
Most people tend to support a progressive tax system, probably because it
seems reasonable that the richest should help out a little more than the
poorest.

~~~
microcolonel
Even in a flat system, the productive contribute more. The current system is
aggressively progressive, almost all the income taxes are paid by a tiny
minority.

~~~
danaris
The rich can afford to give up a much higher percent of their wealth or income
in taxes than can the not-rich.

Living expenses do not simply increase as a linear function of income or
wealth. They increase, sure, but there's an effective upper bound. Jeff Bezos
does not need to buy 10,000 times more food (or food 10,000 times more
expensive) than someone making minimum wage.

Thus, the statement that "in a flat system, the rich contribute more," while
trivially true, serves only to obscure the horribly damaging nature of flat
tax schemes—or, indeed, even schemes that are only as progressive as the one
we have now, which has allowed the very wealthy to accumulate the vast
majority of all gains in the economy for decades.

That's...not a good thing. It's something we need to be working against, and
increasing the progressiveness of our tax scheme (however "aggressive" some
may feel that makes it) is one good way of doing so.

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resters
In any discussion of taxes I think it's important to consider the significant
asymmetry between state and federal taxes.

The incentives created by the policy change in the article are difficult to
anticipate, with reasonable arguments for and against.

It would be significantly better if most of the important tax policy decisions
were made at the state level, so that the consequences could be better
understood.

I live in a high tax state, and hear people complain about the high state
taxes. But my state taxes are a tiny fraction of the massive burden caused by
Federal taxes.

Most of the Federal budget is due to pentagon spending that is not auditable
by design.

Since I have lived in several states I feel completely comfortable evaluating
the ROI of my state tax dollars, but have very little confidence that the
lion's share of my tax dollars (Federal) are being spent wisely or
judiciously.

I pay more in Federal taxes now than I earned in an entire year just a few
years ago, and I'm not wealthy at all, barely middle or perhaps upper middle
class in a major US metropolitan area.

It puzzles me that so many people defend high Federal taxes. I don't know how
high or how progressive taxes should be to be "correct", but I do know that
Federal programs and appropriations are orders of magnitude less transparent
than state and local spending.

I would happily invert the two so that the state got most of the money to do
things like fixing the highways that cause hours of gridlock almost every day,
or removing the lead and chemicals from the drinking water.

Capital gains tax debates try to make people adopt class warfare stances on
what is fair, when the ones getting the best deal are the firms who steal
billions via Pentagon spending.

~~~
thrill
As of this March, the federal budget spending is in three categories:
Mandatory, which is at $2.841 trillion; Discretionary at $1.426 trillion; and
interest on the national debt, $479 billion. Of those three, the DOD is about
half of the Discretionary category, so totaling about 15% of the budget
overall. In other words, the _only_ budget item that the Constitution
explicitly calls for is considered discretionary, and is less than 20% of the
overall spend.

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tshanmu
How does taxing a unrealised sale help? What if it loses value the next year -
will they get a refund?

~~~
jdavis703
Seems like you could write it off as a business loss. It would tank government
revenue in a recession, but perhaps it would also provide an automatic
stimulus effect.

~~~
microcolonel
It would also make it pointless for a private individual or trust to invest.
This is a terrible idea.

~~~
jdavis703
Why would it be pointless? I’m not an economist but it seems like it would
make investments generally less profitable, but I don’t see it eliminating
profits. Further where would billionaires put their money instead? Is the idea
that they are just going to buy art and yachts instead?

~~~
microcolonel
They'll put their money in New Zealand or Canada or Taiwan, maybe. I know I
wouldn't stand for this personally.

~~~
jdavis703
In the U.S. you’re required to pay taxes on income made both domestically and
internationally. Failure to declare those earnings outside the U.S. would
probably be tax fraud.

~~~
microcolonel
> _In the U.S. you’re required to pay taxes on income made both domestically
> and internationally._

As a dual filer, I know this is not true. As a U.S. citizen, you are required
to _file taxes_ on all income, foreign source or U.S. source, but you are not
required to _pay_ taxes on all of it. And why remain a U.S. citizen anyway if
you can't afford it?

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jandrewrogers
Taxing the value of non-liquid or semi-liquid assets is extremely adverse. The
"value" of these assets is _notional_ only, disconnected from actual
liquidation which may have a much lower value _ipso facto_ , especially if
liquidation is forced to pay the tax on the assets. Furthermore, it can put
many people in the position of owing taxes for which there is no realistic
source of income to pay (like the proverbial grandmother's house). And then
there is the vicious downward spiral in valuations of liquid assets this can
create, as assets are dumped to cover the tax liability. The US tax code is
bad enough as it is when it comes to taxing unrealized gains, doubling down on
that would be profoundly stupid and would make many tech startups impractical
from a tax liability standpoint.

All of which ignores that one of the (multiple) important reasons longterm
capital gains are not taxed like income is that those investments are
adversely impacted by inflation, _which is not deductible in the US_. In many
other countries that tax capital gains at income-like rates, the cost basis is
inflation adjusted, which substantially reduces the amount of taxes actually
paid on capital gains. Most countries deal with longterm inflation on capital
gains either by allowing deduction of inflation or lowering capital gains tax
rates to compensate (which is viewed as simpler to implement), but it would
very poor policy to do neither.

tl;dr: This is not realistic tax policy. See also: Chesterton's Fence.

~~~
deanalevitt
re: Chesterton's Fence - great analogy. Until they mention the significant
benefits of the lower capital gains tax, and how raising taxes won't detract
from those benefits, the entire premise appears woefully unprepared.

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dboreham
I'm guessing there's some actual reason we tax capital gains at a lower rate..

Didn't find that in the article but it's probably along the lines of : the
stock market would plummet like a rock otherwise, also real estate. And
everyone's net worth is tied up in those asset classes.

~~~
tomp
_> stock market would plummet like a rock otherwise_

Why would it? I mean, it wouldn't affect the fair value of companies... just
the amount of actual cash you get out of selling the price (and if only
_gains_ are taxed, the tax is proportional, meaning that you it can't tax
profit into loss, only profit into less profit).

~~~
TomMarius
It would create many economical forces causing investors to not want to invest
in the stock market, eventually causing its demise. Each one has been already
described in other comments.

From my (EU citizen) POI, please go ahead. This will help Europe greatly as
it's the most rational place to move assets for most Americans, with many
_great_ places with great tax and business culture + these are really nice
places to live in, actually. That will in turn raise EU wages to the likes of
the USA - thanks!

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dmix
> Just before taking on the role of ITEP’s director of federal tax policy,
> Steve spent more than two years as the senior tax policy analyst for Sen.
> Bernie Sanders and as a member of the senator’s Budget Committee staff.

Some background on the author.

------
deanalevitt
How will this impact retirement plans?

Unless I'm reading it wrong, the premise is that deferring taxation allows for
wealth to grow "unfairly" and that the annual growth should be taxed annually.
Wouldn't this decimate retirement funds, increasing the risk of investing in
stocks and put even more pressure on Americans who already likely to outlive
their retirement savings?

I know it talks about only taxing the 0.1% but that doesn't appear sound to
me. I'm skeptical. I'd feel better if the proponents of this actually
addressed the benefits of a lower capital gains tax and how their plan would
maintain these benefits.

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abakker
I suspect that this would be good for the economy. I can’t prove it, but I
strongly suspect that cap gains deferrals over time are an important component
of encouraging asset bubbles. A huge benefit of The benefit of ETFs have been
to encourage permanent tax deferral of appreciating stocks through swapping
out specific stocks.

On the other hand, as someone in the middle class, i would Really prefer to
not lose my capital gains benefits. If we taxed them as normal income, I’d
love if they would reduce the effective income tax rate.

~~~
coredog64
I don’t think that’s how an ETF works. I can’t buy into an ETF, realize gains,
and then cash out tax free.

The part that is (and IMO, should be) tax free is that when the ETF swaps out
components to maintain their ratio, they aren’t being taxed on it. If they
were, it would just turn into a drag on the fund. It’s not like they’re using
the ETF for HFT.

~~~
abakker
You’re right - I was a bit unclear. What I mean is that ETF balancing activity
ends up being untaxed.

Effectively, you get diversification, gains, reinvestment of dividends, etc
but never have to realize the gains unless you sell. The avoidance at large
probably induces bubbles of asset prices as collectively, early investors
avoid realizing gains.

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petermcneeley
Or we could tax income like we tax corporate profit. The profit of a person is
what remains after all the expenses. So only the net cash year over year is
taxable.

~~~
cheerlessbog
What would be legitimate expenses?

~~~
burlesona
For an individual probably just about anything. I’m guessing the benefit of
the OPs idea is it punishes savings this has a stimulus effect. But,
personally, I’m not a big fan of punishing savings.

~~~
petermcneeley
I was just more commenting on how taxing income of an individual is more like
taxing revenue for a corporation.

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benmccann
Are we really better off if Elon is allowed to own only a small fraction of
Tesla and SpaceX? I worry this proposal has the potential to harm American
competitiveness by forcing entrepreneurs out of the companies they start.

The proposal also would target only American citizens, but if the goal is to
fight inequality shouldn't we tax all mega corporations operating in the US
even if the owners are foreign?

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sjcsjc
There might be a good argument for it of which I'm unaware, but on the face of
it taxing unrealised gains seems grossly unfair to me.

------
gist
Blog 'about' says non partisan. However the author of this article by his past
certainly would appear to have bias:

[https://itep.org/wamhoff-steve/](https://itep.org/wamhoff-steve/)

"Just before taking on the role of ITEP’s director of federal tax policy,
Steve spent more than two years as the senior tax policy analyst for Sen.
Bernie Sanders and as a member of the senator’s Budget Committee staff. In
this capacity, he wrote legislation related to personal income and corporate
income taxes, financial transaction taxes, estate taxes and tax avoidance."

Now before even seeing this I could tell the socialist slant to the writing.
For example he says:

"When the value of an asset rises, that increase is income for all practical
purposes, but our current laws do not tax this income until the asset is sold.
(This untaxed asset appreciation is often called an “unrealized” capital
gain.)"

Except it's not 'income' until it's sold. And until it's sold the value can
vary either higher or lower. Capital gains applies to a host of things
including not only stock but also artwork, real estate, collectibles even
'domain names' being taxed when sold vs. prior. As anyone knows there is no
guarantee with any asset sold will bring a certain price in the market.

Note also that if Warren Buffett has '$70 billion net worth' unless he convert
that net worth to cash he can't do anything with it. (Not discounting that
being a billionaire has other value but that's a separate issue'. If I own an
art collection (I don't) and the value of the art collection has appreciate to
a value of $50,000,000 the only value of that art is that I can sell some and
at that point I will pay taxes on the sale at capital gains rate. Part of the
idea of taxing capital gains at a lower rate is to encourage investment in
certain ways that leads to a presumably better financial good in the end (even
if you are cynical and think there are other motives that doesn't mean that
there aren't legitimate reasons for the lower tax rate).

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betterunix2
The title should be corrected: this proposal applies to _unrealized_ gains.

------
CryptoPunk
This would be absolutely terrible for the economy. Income inequality has to be
tackled by removing impediments that the masses face in participating in the
most lucrative sector and professions, not by pulling down those doing the
best job of expanding capital (e.g. Warren Buffett).

~~~
your-nanny
and what if those impediments are actually the result of political capture,
tent seeking, and regulatory capture, by the ultra-rich? What if the super
rich form an anticompetitive cartel? what if their very existence will
inevitably mean that who you know will matter more than your skills, your hard
work, and good ideas?

~~~
CryptoPunk
>>the result of political capture, tent seeking, and regulatory capture, by
the ultra-rich?

You can't defeat that by trying to reduce the wealth of the rich. There will
always super rich people outside your jurisdiction who you can't tax and who
can exert influence, and super rich people in your jurisdiction who evade your
taxing authorities through legal means and secrecy, or simply because your
taxes are not high enough to prevent them from acquiring massively more wealth
than the average person.

Trying to reduce the influence of money on politics by reducing large
concentrations of wealth is like trying to stop a boat from sinking by boiling
the ocean away. The solution is to plug the holes in the boat's hull, which
means closing the avenues through which money affects the electoral and
political process, not to destroy the wealth generation process by repealing
the reward for creating wealth.

>>What if the super rich form an anticompetitive cartel? what if their very
existence will inevitably mean that who you know will matter more than your
skills, your hard work, and good ideas?

Fortunately that's not how the world works. The rich are far too numerous to
create any kind of sustainable pact. They compete fiercely with each other in
the market, which is why wages have grown 20 fold over the last 200 years, and
grown faster globally over the last 20 years than in any time in history.

The exception to this is politically coordinated government intervention like
the kind that emanates from regulatory capture, which undermines contract
liberty and the ability that provides to reject or defect from a pact.

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amluto
I rather like this idea. Among other effects, it will get rid of the "carried
interest loophole" for real, since carried interest will be taxed just like
everything else.

~~~
coredog64
One can argue that carried interest as applied at hedge funds is extremely
unfair, but it also applies down at the lower end of the spectrum when small
businesses are formed as partnerships with unequal contributions.

~~~
amluto
And that’s fine. With this proposal, it simply won’t be a _loophole_ any more.
You can slice and dice the income however you like, and everyone will be taxed
at (roughly) that same rate that they would be if they worked a regular job
and earned the money the usual way.

------
digitalengineer
I don’t understand American politics... Is this -again- just for show? Why
wasn’t something like this done during the Clinton or Obama administration?
You know, when the democrats had the majority vote?

~~~
jdavis703
During the majority of those years Republicans had majority control of one or
both houses of Congress.

~~~
digitalengineer
Well... if you really wanted to, how much time does one need to push it
through?

~~~
microcolonel
A testament to the greatness of the U.S. system, "just ram it through" is
usually not a valid political strategy.

~~~
digitalengineer
I agree. From what I gather the current administration does not agree. They
get their stuff rammed through. The most insane stuff, I am sorry to say.

~~~
microcolonel
> _I agree. From what I gather the current administration does not agree. They
> get their stuff rammed through._

Well, give it a second look. Nothing weird is actually happening. People are
just running around like headless chickens because they don't like the
President, and to some degree that's fair enough, I don't like him either.

At least this time the President is not using the IRS to harass his political
opponents.

~~~
digitalengineer
Thank you. Just getting unbiased news is harder than ever (at least it feels
this way).

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FighterMafia
At a 9% nominal return, that would imply an after tax return at a 40% rate of
5.4%. Then take out inflation of 2%, and you get a 3.4% real return on stocks.
Which, if you consider the risk is pretty terrible. So would expect markets to
reflect that divergence of risk/return that this bill would introduce and lead
to a massive stock market sell-off.

Kiss your 401(K) good bye! Genius plan.

~~~
asdf333
this is easily solved by phasing it in over time (stock bought before x year
remains under old rules, increase taxes to match ordinary income gradually
over a decade)

