Treasury Secretary Janet Yellen’s proposal backed by Democrats in the House of Representatives to include a tax on unrealized capital gains in President Joe Biden’s spending plan has caused quite a stir.
Although Yellen denied that this would be a wealth tax, House Speaker Nancy Pelosi contradicted her and said that, in effect, this new tax would be a wealth tax on the wealthiest 1%.
The new tax on unrealized capital gains would affect individuals with more than 1 billion in assets or more than $100 million in income for the last three consecutive years. President Joe Biden has expressed support for this idea, however, he excluded it from his campaign.
Under the U.S. tax code, a citizen does not pay taxes on the value of an asset until he or she sells it. The peculiarity of the Democratic proposal is that this tax would be levied on the mere appreciation of the asset, assuming that the appreciation counts as “income” that has not yet been realized.
The tax could potentially impose large tax burdens on the wealthiest Americans, according to The New York Times, at a 20% tax rate, a family with a $10 billion fortune that appreciates to $11 billion will have to pay more than $200 million in taxes on the appreciation of their wealth.
The proposal has the support of the Senate Finance Committee Chairman himself, Senator Ron Wyden (D-OR), who defended it by stating that: “There are two tax codes in the United States: one for workers who pay taxes on each of their paychecks and the other for high flyers who use games and tricks to avoid their taxes.”
The White House justified the tax by claiming that the richest 1% of Americans only pay 8.2% of their income, however, this measure is done by counting the appreciation of their assets as income.
The markets have not yet been alarmed by the proposal, as there are doubts as to whether this tax will withstand scrutiny in the Senate, or if it is at least legal in the eyes of the Constitution, as the Constitution only authorizes Congress to tax income and not wealth.
Even if the proposal makes it past the scrutiny of constitutionalists, it remains to be seen whether the U.S. Congress is willing to impose what would be in effect a wealth tax.
On the Republican side, it is certain that the new tax proposal – like all previous ones – will be fiercely opposed.
Democrats justify the tax because it would allow them to tax assets that normally escape the reach of the IRS. However, in the Democratic Party, not everyone is convinced about the desirability of this new tax.
While prominent figures such as Elizabeth Warren or Nancy Pelosi support the implementation of the unrealized capital gains tax, other figures such as Senator Kyrsten Sinema (D-AZ) oppose the implementation of the tax, an opposition likely to be joined by Joe Manchin (D-WV) who seeks to reach an agreement with the rest of the Democrats on the plan.