Harris Sparks Controversy With Support For Tax On Unrealized Gains

WASHINGTON – As part of her campaign platform, Vice President Kamala Harris has put forward a proposal to tax unrealized capital gains from assets such as stocks and bonds. The proposal has faced opposition from both sides of the aisle, with some critics raising concerns about its constitutionality.

Harris, the Democratic presidential nominee, has supported President Joe Biden’s tax increases outlined in the fiscal year 2025 budget proposal, which includes a plan to tax unrealized capital gains of individuals with a net wealth above $100 million.

While many believe that the proposal has little chance of passing Congress, experts point out several complexities that need to be addressed for it to work effectively. Garrett Watson, a senior policy analyst at the Tax Foundation, explained that one of the key challenges is dealing with illiquid assets, such as private businesses, which are difficult to value. He emphasized that the IRS would need to establish proper valuations to ensure accurate calculation and payment of the tax.

Another issue raised is the need for the government to provide credits for any losses incurred by investors. This provision is also included in the proposal. Watson highlighted the potential concern of the government having to provide refunds to billionaires in the event of a market downturn when gains turn into losses, stating that it may not be well-perceived.

Harris has stated that her policies aim to create an opportunity economy for middle-class Americans. Currently, investors are not required to pay taxes on gains made from stocks and other assets, such as private businesses, until they are sold and realized. Advocates of the proposal argue that taxing unrealized gains sooner is justified as investors do not pay taxes on the asset until it is sold. Additionally, a tax provision known as step-up in basis allows heirs to avoid or minimize tax on an inherited asset by adjusting its value to its fair market value when the investor dies.

The Institute on Taxation and Economic Policy (ITEP), a left-leaning think tank, defends the proposal, stating that it will reduce a significant tax break for wealthy Americans.

However, critics, including former President Donald Trump, express concerns about the potential impact on businesses and wealthy individuals. They argue that business owners might have to sell their companies or assets to pay taxes if they lack the necessary funds, and this could lead to the relocation of wealthy individuals and corporations to other countries.

The Biden administration assures that the tax will only apply to a small percentage of the population. Nonetheless, there are concerns that the tax could be expanded to a larger group in the future under different administrations if it is passed by Congress.

Under the proposed plan, individuals with a net worth of over $100 million would be subject to a minimum effective tax rate of 25% on incomes, including unrealized capital gains. If their calculated effective tax rate falls below 25%, they would owe additional taxes to reach the 25% threshold. According to the Tax Foundation, any additional taxes owed due to the minimum tax would be payable over nine years initially, and over five years thereafter. This means that even if the assets are not sold, wealthy taxpayers would still owe taxes on their capital gains each year.

The constitutionality of the plan has been challenged by Senator Mike Lee (R-Utah), who argues that it cannot be treated as a direct, non-income tax since it is not apportioned.

Supporters of the plan, however, compare it to property taxes, which already account for value increases. They argue that just as homeowners pay higher taxes when the value of their homes goes up, individuals should also pay taxes on unrealized capital gains, even if they do not sell their assets.

While Harris is firm on her proposal, there are differing opinions within her own party. Representative Ro Khanna (D-Calif.), a Harris campaign surrogate, believes that taxing unrealized capital gains would discourage investment in startups and force entrepreneurs to sell their companies to larger institutions, potentially decreasing their value and impacting the startup ecosystem.

Congress previously debated the idea in 2022, but it did not gain enough support. Senator Ron Wyden (D-Ore.) reintroduced the legislation in 2023 with 15 co-sponsors, and President Biden included a version of the plan in his latest budget.

Investors, including Adam Wyden, the owner of a hedge fund in Florida and son of Senator Wyden, have criticized the idea. Adam Wyden argues that policymakers who have never experienced the challenges of running a business should approach the issue with caution, considering the strength and depth of the U.S. capital markets.

Although Harris’s plan differs from Biden’s budget proposal, which suggests raising the capital gains tax on individuals earning more than $1 million to 44.6%, she has not indicated any intention to back down from her proposal. In addition to taxing unrealized capital gains, Harris has also announced other economic policy goals, such as increasing the tax deduction for startup costs from $5,000 to $50,000.

The debate surrounding this proposal involves a delicate balancing act for politicians. On one hand, there is an incentive to address the issue, but on the other hand, implementing the policy would result in a significant reduction in federal revenues, projected to be over $4 trillion over the next 10 years.