{"id":32765,"date":"2024-10-23T10:44:03","date_gmt":"2024-10-23T14:44:03","guid":{"rendered":"https:\/\/poole.ncsu.edu\/thought-leadership\/?p=32765"},"modified":"2024-12-30T10:03:44","modified_gmt":"2024-12-30T15:03:44","slug":"the-pros-and-cons-of-wealth-taxes","status":"publish","type":"post","link":"https:\/\/poole.ncsu.edu\/thought-leadership\/article\/the-pros-and-cons-of-wealth-taxes\/","title":{"rendered":"The Pros and Cons of Wealth Taxes"},"content":{"rendered":"\n\n\n\n\n

One of Vice President Kamala Harris\u2019s centerpiece policy proposals is a wealth tax\u2014a 25-percent minimum tax on unrealized gains for taxpayers whose net wealth exceeds $100 million. If enacted, the tax could bring in more than half a billion dollars of tax revenue over the next decade<\/a>. <\/p>\n\n\n\n

A tax on individual wealth is one path toward reducing the federal deficit, which sits at an all-time high of more than $35 trillion<\/a>. But it is not without its challenges. Let\u2019s explore why taxing wealth (rather than income) is harder than it may seem.<\/p>\n\n\n\n

U.S. Taxes: Income, Not Wealth<\/strong><\/h3>\n\n\n\n

But first, some background on the federal tax system. The federal government taxes an individual\u2019s income at rates ranging from 10 percent for the lowest-earning taxpayers to 37 percent for the highest earners. <\/p>\n\n\n\n

The key word there is \u201cincome\u201d\u2014the federal government collects taxes on what people earn, not what they own. NBA superstar Lebron James has a 2024-2025 NBA season salary of $47.61 million.<\/a> He\u2019ll pay federal income taxes at a rate of 37% on almost all of that income. <\/p>\n\n\n\n

Compare that to Mark Zuckerberg. As the CEO of Meta (the parent company of Facebook), he is paid a salary of $1<\/a>. While additional compensation in company stock raises his annual earnings to around $24 million, the vast majority of his $204 billion<\/a> net worth comes from the increase in value of his holdings in Meta rather than his ordinary income. <\/p>\n\n\n\n

A large amount of Zuckerberg\u2019s $204 billion has gone untaxed. That\u2019s because most of his wealth comes from the increasing value of his assets, which won\u2019t be taxed until he realizes a gain from them (i.e., the securities are sold). <\/p>\n\n\n\n

An analogous situation is the gain taxpayers face when they purchase a home that increases in value. They don\u2019t owe taxes on yearly increases in the home\u2019s value. Instead, they pay taxes on the gain when they sell the house. <\/p>\n\n\n\n

The U.S. currently designs its tax system under a \u201cwherewithal to pay\u201d policy principle, meaning that taxes usually correspond to an increase in the taxpayer\u2019s liquid assets\u2014the cash available to pay tax. A wealth tax would require taxpayers to pay at regular intervals on the appreciation of their assets, regardless of whether they have the cash or liquid assets to pay.<\/p>\n\n\n\n

A Reality Check for Unrealized Gains<\/strong><\/h3>\n\n\n\n

Harris is proposing an expanded calculation of \u201ctotal income\u201d that would include unrealized gains in wealth. Under her plan, high-wealth taxpayers would likely pay taxes on their capital gains each year as their assets appreciate in value. Rather than waiting until their shares are ultimately sold, these \u201cprepayments\u201d would then offset some of the gains on an eventual sale to yield the net taxes owed. Importantly, the proposal is only for taxpayers with wealth in excess of $100 million. Only the ultra-wealthy would bear this additional tax and compliance burden.<\/p>\n\n\n\n

Imposing additional tax burdens on the ultra-wealthy is often a popular place to look to address federal fiscal health. Many support it because, in theory, it just accelerates payment of ultra-wealthy payers\u2019 tax burdens. <\/p>\n\n\n

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\n Consider Dallas Cowboys owner Jerry Jones, who bought the team in 1989 for $140 million<\/a>. Today, the team is worth $11 billion<\/a>.\u00a0Jones\u2019s investment has appreciated by $10.8 billion. If he sold the team today, he\u2019d pay a 20-percent capital gains tax. Harris\u2019s proposal would tax the unrealized gain now and annually as the team\u2019s value rises.\n <\/p>\n \n

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\n $100M\n <\/div>\n

\n Net worth threshold for Kamala Harris’s proposed wealth tax\n <\/p>\n <\/div>\n <\/div>\n\n\n <\/div>\n\n\n <\/div>\n \n\n\n\n

Another benefit of this proposal is that it only applies to about 2,600 people<\/a>. While the average taxpayer may balk at a 25-percent tax increase, virtually none of them would be affected by it. The burdens would fall just on the ultra-wealthy.<\/p>\n\n\n\n

The proposal would also ensure taxpayers actually pay taxes on their investments. There\u2019s a common scheme used by wealthy taxpayers called \u201cBuy, Borrow, & Die<\/a>\u201d. Here\u2019s how it works: A person invests money in an asset (like a sports team) and borrows against that investment to meet ongoing cash needs. The interest they pay on that debt is tax-deductible, reducing their tax burden. They hold the investment until they die, when the asset\u2019s tax basis\u2014its value for tax purposes\u2014may get stepped up. Their descendants inherit the asset at its current value, with little or no taxable event.  <\/p>\n\n\n\n

Not all wealthy taxpayers benefit from this strategy. Estate taxes\u2014or \u201cdeath taxes\u201d\u2014 may reduce its value. And Harris\u2019s proposed wealth tax wouldn\u2019t entirely close the loophole it exploits. But it would be considerably less profitable for wealthy taxpayers. <\/p>\n\n\n