Kamala Harris’s Absurd Capital Gains Tax Idea

Democratic candidate Kamala Harris remains elusive on what policies she would pursue as president. As of Monday, September 2nd—Labor Day here in America—the website for the Harris-Walz campaign still has nothing on her policy positions. 

Fortunately for the American electorate, CNN has done the job that the Democratic candidate has not. On taxes, they explain,

Harris would raise the corporate tax rate to 28%, up from the current 21% rate set by Trump’s 2017 Tax Cuts and Jobs Act. … Also, Harris has said she supports … adding a 25% minimum tax on all income of the wealthiest .01% of Americans, taxing capital gains at the same rate as wage income for those earning more than $1 million

So far, so bad. It gets worse, though. There is one idea that CNN left out: the proposal for a tax on unrealized capital gains. Maybe they did not include it because it is a somewhat complicated matter; after all, other media outlets like USA Today, Fortune Magazine, and Forbes have tried to explain it, but failed. 

The best introduction to it is provided by NBC News:

Under the current system, the federal government only taxes profits from stock investments—commonly known as capital gains—once a stock is sold. The plan backed by Harris would impose a levy on stock holdings as their value increases, whether they’re cashed in or not. 

The tax applies to many different kinds of equity, but the use of stocks as an example has pedagogical merit. 

Proponents of the tax combine a supposedly scientific argument founded in economics with classical socialist anti-wealth rhetoric. The Washington Center for Equitable Growth, WCEG, provides the most efficient example hereof:

The vast majority of Americans are concerned that some wealthy people don’t pay their “fair share” of federal taxes. They’re right to be bothered: loopholes in the U.S. tax code allows [sic] some billionaires to pay taxes equal to only 1 percent of the increases in their wealth, which tax textbooks across the country consider “income.”

The economic argument, which is summarized in the last clause of the last sentence, is more elaborate than the WCEG gives it credit for. It is based on a century-old definition of income known as ‘Haig-Simons’ and is widely used in the literature on tax policy. Among other things, it defines the change in a person’s net worth as income: all other things equal, if your assets increased in value, your income went up, and vice versa.

There are many good arguments against a strict Haig-Simons definition; in 2014, Adam Michel of the Cato Institute suggested that capital gains are not the result of new economic activity and therefore should not be counted as income. This is a good argument, but it rushes to its conclusion. If I own an incorporated business and my sales go up, the value of the shares I own goes up as well. 

With that said, Michel is heading in the right direction, namely that there is a qualitative difference between income from work and income from equity. When the Left, based on Haig-Simons, argues that equity income should be taxed like work-based income, they actually use an allocation theory argument that puts a universe of void space between them and reality. 

Here is what they are in effect saying. Echoing the contributions of the venerable Italian economist Vilfredo Pareto, the Left—represented by the WCEG—presupposes that a difference in taxation would mean that we smoothly move economic activity from one income source to another. 

Put simply: workers and investors can freely and instantaneously switch from working for a living to living off equity, and vice versa. If taxes are higher on equity-based income than on labor income, then people will put in more work and invest less in equity, and vice versa. 

This is a nice theoretical argument, but it has absolutely no bearing on the real world. None whatsoever. This fluidity between income sources simply does not exist. To argue for equality in taxation between equity- and work-based incomes is to argue that there is no difference between walking in the park and riding a bicycle in zero gravity. 

Since their economic argument does not work, the only argument that remains of the WCEG’s case for a tax on unrealized capital gains is the usual ideological talking point about “wealthy people” not paying “their ‘fair share’ of federal taxes.” Since tax data clearly show that the wealthy do indeed pay their fair share, there is really nothing left of the arguments for a tax on unrealized capital gains. 

However, to be fair to the Washington Center for Equitable Growth, they do make an effort to explain how people with a lot of money allegedly ‘unfairly’ lower their tax burden: 

The low effective tax rate arises in part because U.S. billionaires with large stock portfolios and other appreciated assets can borrow money using their considerable financial assets as collateral and then pay little to no taxes on the cash they use to finance their lifestyles. 

A valiant effort. There is just one problem: neither the IRS nor tax professionals mention borrowed money—debt—when explaining how the capital-gains tax is defined and calculated. In other words, the WCEG is wrong: loans used for investment purposes are not deductible on your tax return. In other words, the reason why wealthy people can reduce their tax burden is not their borrowing prowess, but the simple fact that they make capital losses. 

The base for the capital-gains tax is calculated as a subtraction: capital gains minus capital losses. The tax applies to the difference, which means that if the tax is extended to unrealized gains, there must also be a feature in it that adjusts the tax based on unrealized capital losses. 

Here is how it would work. First, let us look at today’s capital gains tax.

• Suppose that on January 1st, 2025, I buy 1,000 Walmart shares at $77 each;
• I also buy 500 Toyota shares for $190 apiece;
• I now have a portfolio worth $172,000;
• Suppose that on December 31st, 2025, my Walmart shares have risen to $87 each, increasing the value of my investment portfolio by $10,000.

Since I did not sell any shares, I did not realize any capital gains. Therefore, I pay no capital gains tax.

Here comes the tax on unrealized capital gains. Suddenly, I have to pay taxes on the $10,000 by which my portfolio value increased. The tax rate seems to vary depending on who reports on Kamala Harris’s proposal; the 25% appears to be a modest assumption, at which I would have to pay $2,500 for the value increase in my Walmart stocks. 

But wait—the current capital gains tax allows for a deduction of capital losses before the tax is calculated. Does that not apply when that tax is extended to unrealized gains?

Yes, of course it does. Suppose again that I do not buy or sell any shares. Suppose also that while my Walmart shares increase in value, my Toyota shares fall from $190 to $170. This reduces the value of my portfolio by the exact same amount as the capital gains from the Walmart tax. I am liberated from my obligation to pay the unrealized gains tax. 

For some reason, leftist proponents of the unrealized gains tax do not bring up the part about unrealized capital losses. 

There is one more aspect of this tax that its advocates need to be held accountable for. Let us go back to their use of the Haig-Simons income definition and accept their premise that all income should be treated equally under tax law. 

Suppose a person’s employer offers him a promotion and pay hike. He now has two documentable incomes: the one he makes now, and the one he would make if he had accepted the offered promotion. 

If he turns down the offer, he has an unrealized salary gain. By the logic of the Left, he must now pay a tax equivalent to the tax on unrealized capital gains. The value of his most prevalent asset, his workforce skills, has increased, just like the value of my shares in Walmart increases. 

The Left will reply that this is a pie-in-the-sky argument, but it is not. We already use a concept closely linked to this scenario when we apply the law to other matters. In some states, the concept of ‘potential income’ is used to estimate how much a parent should pay in child support. If, e.g., a car salesman makes $44,000 per year but his ‘potential income’ is estimated to be $69,000, then his child support obligations are calculated based on $69,000.

By the logic of the Left, the difference between $69,000 and $44,000 is the salesman’s unrealized income—just as the difference between my portfolio before and after the Walmart stock value increase is my unrealized capital gain. Therefore, the salesman should now be forced to pay an extra $5,427 in annual federal income taxes—on his $44,000 income.

Let us remember that so far, the Harris-Walz campaign only wants the unrealized gains tax to apply to people with $100 million or more in wealth. Therefore, at present, the logical flaws in their proposal are limited to the problem of unrealized losses. However, it would be a monumental mistake to assume that the threshold for Kamala Harris’s hate-the-rich tax would not be reduced. 

On the contrary—once the tax on unrealized capital gains is in place, the wealth limit above which it applies will with all certainty fall over time. The motivation for lowering it will be to raise more money for all the new programs that Kamala Harris wants to spend taxpayers’ money on. Within a few short years, the threshold will be $10 million, then $1 million. 

At that point, it becomes a problem for home-owning families with a combined taxable income of $150-200,000 per year. 

Is that really what Kamala Harris’s voters want?