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.
