Biden’s tax on unrealized gains will hit far more taxpayers than he claims

President Biden and Congressional Democrats say they want to make “the rich” pay their “fair share.” Their solution is a massive transformation of the tax system to levy an annual tax on unrealized gains of assets like stocks, real estate and collectibles.

This proposal should be alarming to all Americans as it would drastically expand the IRS’s powers and create new complexity in the tax code. It could grow to hit millions of Americans over time, harm the economy, and is very likely unconstitutional.

President Biden’s Fiscal Year 2023 budget calls for imposing an annual 20 percent tax on taxpayers with income and assets that exceed $100 million, a $360 billion tax increase. This tax is similar to taxes that have long been supported by progressive lawmakers like Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.).

Currently, taxpayers only pay capital gains tax when they sell an asset. This plan would create a “mark to market” regime, forcing Americans to pay taxes every year on the gain in the value of assets like stocks, collectibles, and real estate.

In order to enforce this tax, the IRS would have to be given vast new powers to value the assets of taxpayers. This would be an extremely invasive and difficult task. The agency would have to keep detailed lists of assets of items like jewelry, art, baseball cards, and more. With the IRS’s history of discrimination and malpractice, it should be concerning to have agents collect this information. In the case of a leak, which happens often at the IRS, taxpayers could be subject to burglary or, at the very least, a gross invasion of privacy. 

There would also be significant compliance and administrative issues with this tax. Many assets cannot easily be valued so both the taxpayer and the federal government would be required to hire armies of accountants and lawyers to determine valuations. 

A tax on unrealized gains would harm the economy. Taxpayers impacted by the tax on unrealized gains will be incentivized to move overseas in order to avoid the tax, moving much-needed capital outside the U.S. For those who keep their assets in the U.S., this tax would still lead to a reduction in new investment in the economy, harming working families via wage reduction. 

Estimates of similar taxes have found they would decrease innovation and investment, driving down wages and causing unemployment. For example, an American Action Forum (AAF) study on Warren’s $3 trillion wealth tax proposal found that the tax would shrink GDP by $1.1 trillion over 10 years and would shrink labor income by $785 billion over the same time period. 

While Democrats claim this plan would only hit 700 taxpayers, it’s likely that this tax would grow to hit millions of Americans.

Congress enacted the Alternative Minimum Tax (AMT) in 1969. They targeted 155 people with adjusted gross income above $200,000 who legally paid zero federal income tax due to their large purchases of municipal bonds.

But the AMT grew so large that, by 2010, 30 million Americans (20 percent of filers) were in the crosshairs of the tax. Congress then had to step in a reduce the scope of the tax.

Further, the Biden tax is likely unconstitutional. Article I, Section 9 of the U.S. Constitution bars the federal government from imposing direct taxes unless they are apportioned. In order to get around this constitutional reality, the 16th Amendment was adopted to allow the income tax. A tax on unrealized gains is, clearly, not in compliance with Article I, Section 9, nor is it covered under the 16th Amendment, which the Supreme Court explicitly ruled in Eisner v. Macomber.   

While the left insists that we must tax unrealized gains to ensure that the wealthy “pay their fair share,” the tax code is already steeply progressive.  

According to the Congressional Budget Office, the top one percent of earners paid 41.7 percent of income taxes in 2018 and 25.9 percent of federal taxes. The top 20 percent of earners paid 90.9 percent of income taxes and 69.8 percent of all federal taxes. While the “rich” pay over 40 percent of income taxes, they earn just 21 percent of all income, according to the Heritage Foundation. The bottom 50 percent pay just 3 percent of income taxes, while the bottom 75 percent pay just 13 percent of income taxes. 

In addition, the Joint Committee on Taxation found that taxpayers with incomes of $1 million or more pay an average federal tax rate of 31.5 percent, while the bottom half of income earners ($63,179 or less) pay an average rate of just 6.3 percent. 

The Biden tax will create new complexity in the tax code and expand the power of the IRS. It will wreak havoc on the economy and likely grow to hit far more Americans than intended.

Isabelle Morales is a policy communications specialist at Americans for Tax Reform.