The Big Picture

Bad ideas never seem to go away. In his fiscal year 2023 budget proposal, President Joe Biden put forward a plan that includes $5.8 trillion of spending, runs a $1.15 trillion deficit, and contains $2.5 trillion in tax hikes. One of the 36 individual tax hikes Biden is proposing is a new “billionaire minimum tax,” an idea that incorporates a tax on unrealized gains.

Capital gains are profits on investment. When a gain is unrealized or “on paper, " the investor has yet to make that profit real. For example, if someone bought a stock for $10 and the price increased to $15, he or she would have an unrealized gain of $5. That profit does not become real until the investor sells their stock and pays a capital gains tax.

Unlike income or sales taxes, which tax money moving around the marketplace, a wealth tax goes after the same pot of money year after year. Essentially a tax on large savings, this misguided policy idea is built on eroding and destroying wealth.

This policy idea is fraught with peril, making it essential for conservatives to highlight the many problems that accompany taxes on unrealized gains. Time and time again, Democrats return to this misguided policy idea. On each occasion, they were rebuffed not only by Republicans but also by so-called moderates within their party.

The Details

1. It’s unconstitutional.

• Nowhere in the Constitution is Congress granted the authority to implement such a tax. The 16th Amendment gives Congress the power to collect federal income taxes, not tax assets. Even prominent Democrats like Michael Bloomberg recognize that a wealth tax doesn't pass constitutional muster.

2. It destroys wealth.

• At its core, taxation is the power to disincentivize and destroy. This is the fundamental premise behind taxes on sugary beverages and cigarettes; governments are disincentivizing their use by taxing the products. The same goes for a wealth tax; by punishing Americans for having wealth, you are discouraging wealth in the first place. The economists who helped design Elizabeth Warren’s iteration of a wealth tax commented, "If very rich people have to pay a percentage of their wealth in taxes each year, it makes it harder for them to maintain their wealth."

3. It’s unworkable.

• Thirty years ago, 12 separate European countries had some form of wealth tax. Now, only three remain. French President Macron axed their wealth tax following the exodus of over 42,000 taxpaying millionaires between 2000 and 2012. Every time a wealth tax has been implemented, it has resulted in the same two phenomena: the wealthy population that had previously paid plenty in taxes leaves the state or country, and, thus, tax receipts end up being lower than they would otherwise have been.

4. By punishing investment, it stifles innovation.

• Investors being able to supply innovators with the necessary capital is indispensable. The “one percent,” with their expendable incomes, can invest in ways others simply cannot. The iPhone would not have been created and made affordable for nearly all Americans without the top one percent buying the first very expensive mobile phones and being willing to invest in cheaper modes of production.

5. It’s based on a lie.

• To many on the Left, wealth inequality represents the greatest threat of our time, and the “one percent” is the ultimate boogeyman. In fact, despite accounting for only twenty percent of overall income earned, the wealthiest one percent of Americans pay forty percent of all taxes. Almost all investment comes from the rich, making products cheaper and better (increasing wealth for others) or providing more opportunities for much-needed loans from banks (also increasing wealth for others). The rising tide of economic growth truly lifts all boats.

Why it Matters

Even though the United States already has the world’s most progressive and onerous tax codes, champagne socialists on Capitol Hill relentlessly feed their “tax the rich” narrative. A tax on unrealized gains is a bad policy and beyond the federal government’s constitutional authority, plain and simple.

Taxing unrealized gains is a dangerous, unconstitutional, and unworkable solution to a nonexistent problem. Biden’s proposed “billionaire minimum tax” is nothing more than a tired retread of failed leftist policy. Unfortunately, much like socialism, no matter how often taxing wealth fails, there will still be those who insist on pushing this disastrous policy item.

Lawmakers would be wise to abandon President Biden’s dismal budget proposal and instead pursue a plan to put the United States back on fiscal sanity and embrace innovation rather than punishing investment.