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A Democratic proposal to tax the unrealized gains of billionaires could have an unwanted side effect: the government cutting checks to the wealthiest in down times.
Senate Finance Committee Chairman Ron Wyden of Oregon, a Democrat, has suggested offsetting some of his party's multitrillion-dollar infrastructure and social spending by imposing an annual tax on the unrealized capital gains of individuals whose wealth exceeds $1 billion.
Today, billionaires whose investments grow in value are taxed on those increases, called capital gains, but only when those assets sell. The new plan would tax billionaires' investments even if they are not sold.
But one of the major questions about the plan, which Wyden has discussed for years and gained support from President Joe Biden but has not been put forward, is how to handle losses. If one of the world's wealthiest people has an off-year, conceivably, the government would have to pay them a tax refund. The optics of taxpayers subsidizing billionaires would present terrible appearances for the government and Democrats.
For example, Harold Hamm is the founder of major oil and natural gas firm Continental Resources. He holds nearly 80% of the company's stock, which plummeted by more than 40% during the pandemic. He lost about 43% of his net worth in 2020, a decline of some $4.3 billion.
If the billionaire tax were implemented, Hamm may have received some of that money back directly from taxpayers because he would have reported a capital loss. On the other hand, supporters of the plan may point out those funds would end up going back into the public coffers next year if Continental Resources rebounded.
A Finance Committee spokesperson told the Washington Examiner that while legislative text is forthcoming, the new tax would only apply to tradeable assets, such as stocks, and not nontradeable assets, such as real estate or closely held companies.
The spokesperson confirmed billionaires would get to deduct losses. Still, when pressed for details about what that would look like, the spokesperson didn’t reveal any more and said those specifics would be included in the legislative text.
“If you’re worried about the optics of billionaires not paying taxes on unrealized gains, how will it look if they get refunds for losses from the government during a recession potentially?” Garrett Watson, senior policy analyst at the Tax Foundation, told the Washington Examiner.
Tifphani White-King, head of U.S. tax practice at Mazars USA, said how the plan would handle losses is “a huge unknown.”
“You’re not only tracking appreciation, but you have to look at the depreciation as well,” she said. “So, what does happen in those loss years?”
White-King, who also sits on Mazars’s global tax practice board, said there may be a common assumption that, just because the population in question is high-wealth, they will always have tax liabilities.
“The way the markets are fluctuating and the way you value assets, it’s not necessarily the case,” she told the Washington Examiner. “And I think we all know, valuation is a huge unknown in this world, how we value assets it changes all the time and in every industry."
Generally, public opinion is that the more money one makes, the more taxes he or she should pay. White-King said the optics of billionaires claiming losses on their unrealized capital gains “could certainly be discouraging and damaging” for lower-income people.
“Particularly during a time like this as we’re trying to emerge from a pandemic,” she said. “So, if there’s some type of benefit for a small group of people, is that fair, is that equitable, is that just? I think you come back to those sorts of philosophical questions.”
The problem would be particularly notable if a recession lowered stocks across the board.
Many billionaires hold their wealth in the form of stocks, so a broad stock market downturn could create the spectacle of the government cutting checks to dozens of billionaires while millions of others face job loss and hardship — a scenario that could look bad for Democrats whose rallying call is higher taxes on the wealthy.
“They would have to in one way or the other,” said Rep. Kevin Brady, the GOP’s top tax writer, regarding the U.S. offsetting losses. “Bottom line is if you go down that road and tax people on imaginary gains, you’ve got to pay them back for imaginary losses — or unvalued losses. And I don’t think that’s anything the American public will accept."
However, Democrats have some options in writing legislation to avoid such a situation. They could permit deductions for those losses and impose limits on those deductions. They could also allow them to carry forward to offset future gains, according to the Wall Street Journal.
Exactly how losses will be handled under the plan will be revealed when the legislative text is released, although it is unclear when that will come.
“I think we just need some clear guidance on what happens in the case of a loss year and the application of a rule such as this,” White-King said.
There are other issues with the plan that have been raised as well.
Robert Hoberman, managing partner at New York City accounting firm Hoberman & Lesser, told the Washington Examiner the plan to tax the unrealized gains of billionaires would harm businesses by hamstringing CEOs into selling company stock to foot their tax bill.
The IRS could also face administrative challenges in sifting through the massive webs of liquid assets that billionaires have, which might require more staffing and funding.
Regardless, the measure would be a heavy lift for Democrats given their wire-thin majority in the House and Senate. They could not afford to lose even a single vote if they want the plan to pass — and with centrists like Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, that might be a difficult proposition.
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Original Author: Zachary Halaschak