He would tax the rich’s capital gains as regular income — every year.
A couple weeks ago, I walked through a wealth tax proposal from Berkeley economists Emmanuel Saez and Gabriel Zucman that would totally upend the charitable sector in the United States by taxing foundation wealth and forcing billionaires to donate directly to nonprofits they don’t control.
It’s a big idea with a lot of barriers facing it, not least arguments that the Constitution prohibits the direct taxation of wealth. But last month, Senate Finance Committee ranking member Ron Wyden (D-OR) proposed a relatively more modest — yet still dramatic in its own right — change that has a much better chance of making it through under the next Democratic president that would effectively tax wealth and constrain philanthropy in similar ways.
Wyden’s proposal would change the way the US tax code affects property that’s increased in value. Right now, our capital gains system taxes upon “realization”: the time the asset is actually sold. If I bought a painting by Jean-Michel Basquiat in 1977 for $50 and then sold it today for $100 million, I’d pay a 23.8 percent tax (lower than the typical top tax rate) on the $99,999,950 gain at the time of sale. The same goes for stocks and bonds, for other investments, for real estate (though your first $250,000 in gains on a home are tax-free), etc.
Wyden would change to a “mark-to-market” system. That is, for wealthy Americans who report income above $1 million or assets above $10 million for three consecutive years, taxation would no longer be tied to when people sell their stocks, artwork, or houses. It would instead happen every year that the asset gains in value. If I hold stock worth $20 million one year and it increases in value to $23 million the next year, I would pay tax on that $3 million gain when I file taxes that year.
Now, this is an easy change to make for liquid assets like stocks and bonds. It would be harder to put into effect for assets like real estate, privately held businesses, and artwork. Those kinds of assets aren’t always reassessed in value every single year.
For those, Wyden’s plan would apply a “lookback rule” so that when they are sold, they are taxed the same amount as they would have been if they had been taxed every single year as they grew in value. That, effectively, would mean a much higher overall tax rate than they currently face under the capital gains tax.
The benefits of mark-to-market taxation
For proponents of increased taxes on wealth accumulation, a mark-to-market tax like this has a number of key advantages. It raises fewer constitutional issues than a wealth tax (though some have argued mark-to-market taxes are unconstitutional regardless, it seems clear to me that it stands a better chance of surviving the Supreme Court). It eliminates “lock-in,” or the effect capital gains taxes sometimes have of discouraging owners of investments from selling them for fear of incurring tax.
And because it eliminates lock-in, mark-to-market taxation allows capital gains rates to go substantially higher. Under current law, the revenue-maximizing rate for capital gains is around 30 percent; that is, nudge the rate any higher and lock-in would kick in, which would mean fewer people selling their assets and hence less tax revenue.
But a mark-to-market system would allow rates well above that. Indeed, key to Wyden’s proposal is a provision that would eliminate the preferential tax rates on capital gains and apply the top 37 percent rate for wage income (or higher top income tax rates that a Democratic president will likely impose) to capital gains as well.
NYU tax law professors Lily Batchelder and David Kamin have estimated that a mark-to-market tax limited to the top 1 percent of earners could raise $1.7 trillion over 10 years, or almost as much as a wealth tax proposal like Elizabeth Warren’s, who would put a 2 percent annual tax on wealth above $50 million and a 3 percent tax on wealth over $1 billion. Raising top tax rates for income at the same time would bring in even more.
Most notably for philanthropy, the proposal would dramatically shrink new fortunes from newer industries like tech. Saez and Zucman told the Wall Street Journal that, by their estimates, the Wyden plan would’ve amounted to a 16 percent per year wealth tax on Mark Zuckerberg for the past decade. That’s far higher than the 3 percent annual wealth tax Elizabeth Warren has proposed, on their advice.
Passing the tax now doesn’t exempt Zuckerberg, either. He would have to pay a tax upon the Wyden plan’s passage for all the gains in his Facebook stock since he started the company, as would anyone else with assets that have appreciated in value that they have yet to sell. That levy, as well, could far exceed a 3 percent wealth tax.
“Old money,” or fortunes that have been roughly stable for a long time, would be less hard hit by the change. Their wealth didn’t suddenly shoot up in a way that produces a capital gain this plan would tax.
So if Wyden — a relatively moderate Democrat who is likelier than Warren or Sanders to get the rest of his caucus on board — succeeds, the charitable deduction could become an even more crucial out for the Mark Zuckerbergs of the world.
If the choice is to donate their gains and deduct them right now or face a huge one-time tax on them, the former might be their choice. If it is, that could prompt a flood of tech money into philanthropy, for better or worse.
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