Biden Is Trying To Pass a Wealth Tax—Again. It Could Be Unconstitutional.

[Kamaji]

Biden Is Trying To Pass a Wealth Tax—Again. It Could Be Unconstitutional.

The president's new budget plan calls on Congress to tax wealthy Americans' unrealized capital gains.

IRA STOLL
3.28.2022

President Joe Biden got elected in part by portraying himself as a moderate, rejecting calls for a wealth tax by his primary campaign rivals, Sens. Elizabeth Warren (D–Mass.) and Bernie Sanders (I–Vt.).

Now that Biden has made it to the White House, though, he just won't drop the idea, even though, like many of his tax-and-spend plans, he can't manage to get it through the Democrat-controlled Congress.

Biden first floated what I called the "Biden-Wyden wealth tax," after Sen. Ron Wyden (D–Ore.), the chairman of the Senate Finance Committee, back in October 2021. It went nowhere, thanks in part to the dynamic duo of Sens. Joe Manchin (D–W.Va.) and Kyrsten Sinema (D–Ariz.), who deserve credit for saving Biden from his party's worst policy ideas. It was too much even for Speaker Nancy Pelosi (D–Calif.), who, The Washington Post reports, privately derided the Biden-Wyden wealth tax as a publicity stunt.

Now, like a sequel to a movie that wasn't any good the first time around, a variation of the Biden-Wyden wealth tax is back for another try in the president's latest budget. This time around, the White House is trying to sell it using slick language. The New York Times reports that a White House document described the tax, aimed at those with assets of more than $100 million, as "a prepayment of tax obligations these households will owe when they later realize their gains."

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Source:  https://reason.com/2022/03/28/biden-wyden-wealth-tax-unrealized-gains-unconstitutional/

[andy58-in-nh]

If the Federal government were allowed to tax things that existed only hypothetically, then perhaps they ought to start with Democrats' understanding of economics. 

[Kamaji]

If the Federal government were allowed to tax things that existed only hypothetically, then perhaps they ought to start with Democrats' understanding of economics. 

Unrealized gains aren't exactly hypothetical.  If I bought IBM stock at $100/sh, and it's currently trading at $110/sh, I have an accretion to wealth equal to $10/sh; the only thing is, I haven't realized that gain yet.  In fact, I could even monetize that unrealized gain in a variety of ways - i.e., get access to that economic wealth and use it for other purposes - without having to recognize the gain for tax purposes.

That being said, it is still a mostly open question whether Congress can in effect "force" realization by imposing a mandatory tax on unrealized gains.  The one area where Congress has imposed a mandatory tax on unrealized gains is the so-called "exit tax" of IRC §877A, which taxes certain expatriating citizens and long-term residents on the unrealized gains in their assets by creating a fictional sale for fair market value the day before the individual expatriates.

[EdinVA]

Unrealized gains aren't exactly hypothetical.  If I bought IBM stock at $100/sh, and it's currently trading at $110/sh, I have an accretion to wealth equal to $10/sh; the only thing is, I haven't realized that gain yet.  In fact, I could even monetize that unrealized gain in a variety of ways - i.e., get access to that economic wealth and use it for other purposes - without having to recognize the gain for tax purposes.

That being said, it is still a mostly open question whether Congress can in effect "force" realization by imposing a mandatory tax on unrealized gains.  The one area where Congress has imposed a mandatory tax on unrealized gains is the so-called "exit tax" of IRC §877A, which taxes certain expatriating citizens and long-term residents on the unrealized gains in their assets by creating a fictional sale for fair market value the day before the individual expatriates.

And then, hypothetically speaking, the feds force the stock to crash and you end up selling for $50 per share, will you then be able to write off a $60 loss or $50 loss per share?  And how will anyone keep those kinds of records over decades as the stock will rise and fall in value.... what a mess

[andy58-in-nh]

Unrealized gains aren't exactly hypothetical.  If I bought IBM stock at $100/sh, and it's currently trading at $110/sh, I have an accretion to wealth equal to $10/sh; the only thing is, I haven't realized that gain yet.  In fact, I could even monetize that unrealized gain in a variety of ways - i.e., get access to that economic wealth and use it for other purposes - without having to recognize the gain for tax purposes.

That being said, it is still a mostly open question whether Congress can in effect "force" realization by imposing a mandatory tax on unrealized gains.  The one area where Congress has imposed a mandatory tax on unrealized gains is the so-called "exit tax" of IRC §877A, which taxes certain expatriating citizens and long-term residents on the unrealized gains in their assets by creating a fictional sale for fair market value the day before the individual expatriates.

The practical problem with that sort of law is that an unrealized gain can just as instantly become an unrealized loss when one is dealing with assets whose valuation can change based upon the vicissitudes of daily, or intraday pricing. The resulting uncertainty would throw the markets into a nightmarish frenzy, and drive capital out of this country. 

The larger problem is that it is utterly unconstitutional, as the 16th Amendment only allows the Federal government to tax income, not unrealized appreciation of personal property.

[Kamaji]

And then, hypothetically speaking, the feds force the stock to crash and you end up selling for $50 per share, will you then be able to write off a $60 loss or $50 loss per share?  And how will anyone keep those kinds of records over decades as the stock will rise and fall in value.... what a mess

Record-keeping becomes easier in a mark-to-market system because you always know what your current basis in the asset is:  last year's opening basis, plus any gain taxed, less any losses allowed.

It rolls forward year to year, and is easier than trying to find original purchase records for stock one purchased 20 or 30 years ago.

Mark-to-market losses would, in principle, be allowed, but it's likely that this sort of nonsense would follow the same general rules that apply to PFIC stock for which a mark-to-market election has been made:  namely, losses are only allowed to the extent of prior inclusions of gain (to the extent those prior inclusions were not previously reversed by other losses).  As a result, the only way to recognize an overall loss (i.e., FMV is less than original cost) is by selling the asset.

[Kamaji]

The practical problem with that sort of law is that an unrealized gain can just as instantly become an unrealized loss when one is dealing with assets whose valuation can change based upon the vicissitudes of daily, or intraday pricing. The resulting uncertainty would throw the markets into a nightmarish frenzy, and drive capital out of this country. 

The larger problem is that it is utterly unconstitutional, as the 16th Amendment only allows the Federal government to tax income, not unrealized appreciation of personal property.

Things are not quite that simple.  The 16th Amendment does not necessarily require a realization event; it speaks in terms of income, from whatever source derived, not income received or income realized.

[catfish1957]

And then, hypothetically speaking, the feds force the stock to crash and you end up selling for $50 per share, will you then be able to write off a $60 loss or $50 loss per share?  And how will anyone keep those kinds of records over decades as the stock will rise and fall in value.... what a mess

Plus the fact you can only claim $3K captial loss annually   But if you have a $1M capital gain, you think it is graduated?  LMAO.....

That $3K has been pretty much an annual fixture on my Sch. D since the '80's.  And it probably will outlive me.

The Federal Government games the system to their advantage.  But everyone knew that.

[EdinVA]

I suspect that what the socialists are after is the equity in real estate and a way to do away with the $250K exemption.

[DefiantMassRINO]

This may take us back to mark-to-market accounting which exponentially accelerated the deflationary death spiral in the 2008 financial crisis.

Local property taxes are a wealth tax.  My tax amount increases annually with the estimated unrealized gains in the value of my house and land.  My monthly local property tax costs me more than my monthly mortgage principal and interest.

The trick is how they define "asset" and "unrealized gains" - does that include deferred tax retirement accounts - IRA's, 401-K's, etc?  Personally, I think they are targeting any pile of money or assets that financial institutions report to the IRS.

I may have to put my money in my grandparents' old bank:



... Chock Full O' Nuts Coffee can hidden behind a wall panel

[catfish1957]

Things are not quite that simple.  The 16th Amendment does not necessarily require a realization event; it speaks in terms of income, from whatever source derived, not income received or income realized.

I will go on record that two events will happen in the next 10- 20 years that will end investing and wealth in this country as we know it.

1. (As discussed earlier) Taxation of unrealized gains.
2. Confiscation of 401-K, and IRA's to be added into governmental run revised social security pension system.

When the world decouples from the $USD, and our dollar floats, an inflationary boom that dwarfs what is going on right now will ensue.  That will cause a dominoing process making it difficult, if not impossible for Fedzilla to fund debt, and base social constructs like social security and medicare.  To cover that shortfall, it will have to come from somewhere.  Guess where.

[Kamaji]

I will go on record that two events will happen in the next 10- 20 years that will end investing and wealth in this country as we know it.

1. (As discussed earlier) Taxation of unrealized gains.
2. Confiscation of 401-K, and IRA's to be added into governmental run revised social security pension system.

When the world decouples from the $USD, and our dollar floats, an inflationary boom that dwarfs what is going on right now will ensue.  That will cause a dominoing process making it difficult, if not impossible for Fedzilla to fund debt, and base social constructs like social security and medicare.  To cover that shortfall, it will have to come from somewhere.  Guess where.

#1 I don't know about, mainly because it would run into the mother of all procedural messes if unrealized gains in non-marketable assets had to be recognized each year.  The mess would be orders of magnitude greater than the mess the IRS had determining depreciation deductions prior to the enactment of the MACRS system under IRC 168.

#2 I think has a 50/50 risk at this point in time.  The dems would dearly love to seize all privately owned 401(k)s and other tax-advantaged retirement plans, and substitute them for the thin gruel of some additional claim to social security upon retirement. 

[DefiantMassRINO]

I don't think they would seize IRA's and 401-K's outright.  They are more likely to remove the tax deferal so they can get revenue from the gains now ... for the children.

I'm a Gen-X'er.  I don't expect the Government to do me any favors.  I saw them change the rules in the middle of the game to hose my parents' generation (pre-Boomers).

Like any other thieves, the Government and Wall Street cannot bear the thought of all those piles of wealth just sitting there for the taking.

[catfish1957]

#1 I don't know about, mainly because it would run into the mother of all procedural messes if unrealized gains in non-marketable assets had to be recognized each year.  The mess would be orders of magnitude greater than the mess the IRS had determining depreciation deductions prior to the enactment of the MACRS system under IRC 168.

In a normal world yes, but the IRS has never had a problem leaving the reponsibilty and onus of record keeping and reporting to the taxpayer.  Like for me in the old days trying to work multiple pages of 8949's, and a ream of paper to keep up with it   Except in this case, have to run ongoing annual assest sheets of holdings to track unrealized gains.  Beleive me, the IRS doesn't care if it creates more work for you.

[LMAO]

I don't think they would seize IRA's and 401-K's outright.  They are more likely to remove the tax deferal so they can get revenue from the gains now ... for the children.

That’s what they are more likely to do. That would be the path of least resistance versus just outright seizing peoples retirement accounts

I had a patient who said that his mom and dad built some wealth from their business in Italy and it was all seized  by Mussolini when he came to power so you never know

[catfish1957]

I don't think they would seize IRA's and 401-K's outright.  They are more likely to remove the tax deferal so they can get revenue from the gains now ... for the children.

I'm a Gen-X'er.  I don't expect the Government to do me any favors.  I saw them change the rules in the middle of the game to hose my parents' generation (pre-Boomers).

Like any other theievs, the Government and Wall Street cannot bear the thought of all those piles of wealth just sitting there for the taking.

Early in the Obama administration this confiscation was discussed in subcommittee hearings. Of course, it would be hugely unpopular, but like I said earlier, if the government has its back against the fiscal wall, options will be few, and this would be their easiest target. And they would claim it was not stealing since it was added for a combined social security program.

[Wingnut]

That’s what they are more likely to do. That would be the path of least resistance versus just outright seizing peoples retirement accounts

I had a patient who said that his mom and dad built some wealth from their business in Italy and it was all seized  by Mussolini when he came to power so you never know

Look what Brandon Trudeau did in Canada to the Freedom Convoy participants Bank accounts.  It could happen here.

[Kamaji]

I don't think they would seize IRA's and 401-K's outright.  They are more likely to remove the tax deferal so they can get revenue from the gains now ... for the children.

I'm a Gen-X'er.  I don't expect the Government to do me any favors.  I saw them change the rules in the middle of the game to hose my parents' generation (pre-Boomers).

Like any other thieves, the Government and Wall Street cannot bear the thought of all those piles of wealth just sitting there for the taking.

I think they would want to get the assets of the 401(k)s and other tax-advantaged plans.  The problem is how to seize the assets without having to pay cash-based reasonable compensation for the seizure.

My guess is that they will use a carrot and stick method, where the carrot is that if you turn over the accounts, you get some additional claims against social security, and don't have to pay tax at all on the accrued value of the 401(k), or other account, and the stick will be that they will accelerate taxation of all of the underlying funds, and impose an interest charge on the deferred taxes.  In other words, you get to keep your 401(k) if you really want it, but you're going to pay the mother of all taxes on the untaxed value of the account, plus the 10% haircut, but otherwise you get to exchange it tax-free for some nominal additional interest in social security.  Of course, that interest in social security won't, technically speaking, be a vested right, so if the social security laws change in a few years, you won't have any claim to compensation for that subsequent change.

[DefiantMassRINO]

Ah, the old "we'll make them an offer they can't refuse" voluntary involuntary account roll-over opportunity.

I like it.  Has more Orwellian panache.

[Kamaji]

Ah, the old "we'll make them an offer they can't refuse" voluntary involuntary account roll-over opportunity.

I like it.  Has more Orwellian panache.

Bingo.  And, since it's technically a "voluntary" choice to hand over the 401(k), it avoids any real claims for just compensation for a taking under the Constitution because, well, it wasn't really "taken" was it.

[Hoodat]

Why not just cut spending instead?  Besides, it doesn't matter how you set the tax rates.  Government will bring in 19% of GDP no matter what the rate is.  Your only decision here is to choose your GDP.    Biden clearly is choosing a low one.

[Kamaji]

Quite honestly, if they were to enact some sort of a generalized unrealized-gains/MTM tax regime, I would expect a lot more wealthy Americans to simply expatriate - the MTM tax would be a one-time thing only, and thereafter, you're out of the U.S. tax net, permanently.

Uruguay would be a relatively decent place to move to, and once a sufficient number of other wealthy Americans have moved there, it'll become quite stylish.

[DefiantMassRINO]

Cut spending?  That ship sailed in 2000.  Even Republicans have abandoned fiscal restraint to participate in a hedonistic orgy of Federal deficit spending worthy of Caligula.

The Establishment is busting the country out, and burning it down for the insurance money.

[Hoodat]

Uruguay would be a relatively decent place to move to, and once a sufficient number of other wealthy Americans have moved there, it'll become quite stylish.

Ssshhhhh.  Keep quiet on Uruguay.  That's my bailout plan.

[Kamaji]

Ssshhhhh.  Keep quiet on Uruguay.  That's my bailout plan.