The Supreme Court recently announced it will take up a landmark case next term regarding whether Americans can be taxed on their unrealized income. This will have sweeping implications for tax policy at all levels of government. At issue in a petition filed by two Washington state residents, Charles and Kathleen Moore, is whether the government can impose taxes on the increased value of all of your assets each year–even those that haven’t been sold. This concept ranks high atop the list of wealth taxes sought by some Democrats in Congress and state legislatures—but in addition to being constitutionally questionable, it is deeply flawed and unworkable.

Don’t get me wrong: as a lifelong Democrat, I support a progressive tax code and a fair tax system. And as a member of President George W. Bush’s tax reform commission, I pushed to clear out the carveouts and special interest loopholes in the tax code. But a tax on unrealized gains is just bad policy, plain and simple.

For one thing, it doesn’t make any sense. Unrealized gains are–by their very definition–unrealized. They don’t exist. How can we tax individuals and families on income that they haven’t received? Think of the chilling effect this would have on everyday savings and investment. It is also unworkable. For liquid assets–like publicly traded stocks—values rise and fall year to year, while valuing an illiquid asset—like a family business—is complicated and expensive. This is basically a “guess tax.”

Taxing income that doesn’t exist puts taxpayers in the impossible position of having to sell assets just to pay the tax. In particular, this would force unthinkable decisions on our family-owned farms and businesses, which don’t have assets that can easily be sold off. They would have to figure out how to pay their tax bills while trying to pass on their operations to the next generation.

While workers and businesses suffer, the well-connected would just do what they do now: get their lawyers and accountants to come up with ways to dodge these new taxes, from sending money overseas to setting up trusts and charities to hide wealth. Or, since all of this would be based on guesses and estimates, they could try to bury the IRS in years of legal appeals over such subjective assessments of ‘wealth.’

Lastly, our history shows that even if a new tax starts out as incremental or limited to certain income brackets, it expands over time. This is exactly what happened with the income tax.

It should come as no surprise that several European countries tried to impose this tax only to see it fail across the board. Many of the families these governments were trying to target simply moved their investments and businesses elsewhere. French economists determined that the country’s wealth tax was costing twice as much revenue as it generated. President Macron said it made France “Cuba without the sun.” In Norway, which is now losing tens of millions in tax receipts, one expert has compared the self-inflicted damage to Brexit. 

Instead of wealth tax schemes that do far more harm than good, here is a better–and much more straightforward–idea: enforce the tax code is that currently on the books. While tax compliance rates for low- and middle-income families are high, research cited by the Treasury Department finds that the wealthiest Americans underpay their taxes by the staggering sum of $163 billion annually. The U.S. loses tax revenue it is owed at a level equivalent to 3 percent of GDP.

Much is at stake for the tax code over the next year, not only on the docket but on the ballot as well. Washington’s focus should be on ensuring the wealthy pay what they owe under the law. Otherwise, everyone will end up paying the price.

John Breaux is a spokesman for Saving America’s Family Enterprises, a nonprofit, nonpartisan educational organization advocating against tax proposals that complicate the tax code. He served as a U.S. Senator from Louisiana from 1987-2005, and was co-chair of the 2005 Tax Reform Commission.

They reflect expected profits, which often fail to materialize, and the levy wouldn’t hit only the rich.

By Richard B. McKenzie

President Biden and Sen. Bernie Sanders attest that the share of the country’s wealth held by the very well-off is unfair and the product of a rigged economic system. They say the U.S. needs a wealth tax, starting with a levy on unrealized capital gains. These redistributionists are acting as if unrealized capital gains are stored in vaults like gold and can be collected at Congress’s will.

They don’t appreciate the ephemeral nature of stocks. A stock portfolio of $100 million is best approximated by the present discounted value of its firms’ future profit streams. Redistributionists point to wealthy people’s portfolio gains, which they call unrealized and untaxed income. But current income and capital gains are conceptually different. Firms’ future profits, the estimates of which cause portfolios to rise or fall in value, haven’t yet been realized. A tax on unrealized capital gains thus amounts to a tax on unrealized future profits that in many cases will never be realized, except at losses—especially if added taxation increases the likelihood of unrealized profits.

Current profits are only one factor investors use to appraise a company’s value. Investor expectations of future profitability often count for far more. How much more depends on the intangible: investors’ evaluations of interacting future market forces, including hunches and speculations based partially on others’ speculations. An investor’s unrealized capital gains can also be inflated by the eager bids of overly optimistic buyers, which could make a wealth tax a tax on phantom gains.

Wealth, subject to taxation, is fraught with risk because profit streams unfold differently as a result of ever-changing market, social, geopolitical and atmospheric forces over which the companies have no influence. Bank stockholders recently rediscovered the risks embedded in presumed safe investments that result from untethered fiscal and monetary forces. Did Messrs. Biden and Sanders anticipate how their policies charted a path to higher interest rates, leading to capital losses in bank holdings of federal securities? I think not.

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The proposal, floating around Washington and state legislatures, would create more loopholes than it closes and chill investment.

By John Breaux

America’s tax code contains far too many loopholes. Yet rather than close them, lawmakers across the country want to establish a new levy that would create more. The latest plan circulating around Washington and state legislatures is a tax on “unrealized gains”—an effort to collect more revenue from the wealthy. But if enacted, the policy would have the opposite of its intended effect, allowing high earners to game the system further and transform how income and investment is taxed in this country.

Under current law, when we sell an asset—be it property or stock—we pay taxes on the profit. The new proposal would eliminate this arrangement and require taxpayers to pay tax on the increased value of all of their assets every year—whether they’re sold or not. A homeowner, for example, would have to seek out an appraisal of his property’s worth. With each year, he’d then pay a tax on its increase in value. Such a process would be subjective, complex and onerous both to taxpayers and the government.

As a longtime senior member of the Senate Finance Committee and a co-chairman of President George W. Bush’s 2005 tax-reform commission, I advanced and supported ideas to hold the wealthy accountable for paying what they owe. I agree with President Biden’s latest assessment in his State of the Union address that “the tax system is not fair” and that “we have to fix it.” Research cited by the Treasury Department suggests we’re losing more than $160 billion each year because the top 1% of taxpayers aren’t paying what they owe. That should change—and quickly.

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Washington, D.C. – March 16, 2023 – Today, Saving America’s Family Enterprises, Inc. (SAFE), a nonprofit, nonpartisan educational organization, announced that former Senator John Breaux (D-LA) will serve as a senior advisor to and spokesperson for the organization. This announcement follows the release of President Joe Biden’s Fiscal Year 2024 budget which includes a new tax on unrealized gains. Legislation taxing unrealized gains has also been introduced in numerous states. If enacted, these proposals, which are based on subjective and ever-changing valuation of assets, would make our tax code more complex and create new ways for the wealthy to evade taxes. 

“I support a progressive tax code and agree that the wealthy should pay what they owe. A tax on unrealized gains is simply not the answer. Taxes on unrealized gains are based on guesswork and will add more complexity in the tax code by creating new loopholes for the wealthy. The tax code should support hardworking taxpayers, small businesses, and family farms,” said Senator John Breaux.

Senator John Breaux was a senior member of the Senate Finance Committee and played a leading role on tax policy throughout his over 30 years of service in Congress. He co-chaired President Bush’s 2005 Tax Reform Commission, was a founder of the Centrist Coalition of Senate Democrats and Republicans, and was the chairman of the Democratic Leadership Council.