Mr. Biden’s new tax policy has proposed yet another angle to get more tax revenue from the “millionaires and billionaires.” This time he’s circling back to see if he can get a tax on unrealized (unsold) taxpayers’ gains after all. The new twist is that this tax policy is limited to those folks with more than $100 million in net worth. Under current law, only assets that are sold for a profit are taxable, and they are never taxed if held to death. Mr. Biden claims this is an “unfair” loophole incentivizing taxpayers to avoid sales. Duh. But in making this point, he conveniently forgets that estate taxes are designed to catch this “unfair” 23.8% tax, making it 40% instead. He apparently wants his cake and the horse it rode in on.
This proposal will be dead in the water for several reasons, the peskiest of which is the 16th amendment of the US Constitution. This rule constrains the federal government’s reach in collecting taxes to income. Instead, Mr. Biden’s proposal is a property tax, which the Constitution does not allow. Brace yourself for supporters’ wordsmithing that the Constitution does not explicitly rule out property taxes. But the Constitution does say that any power not specifically granted to the federal government is remanded to the states, which routinely levy property taxes. Checkmate.
More practical limitations also apply. While Mr. Biden claims that taxes can be spread over nine years, what happens to changes in value in the meantime? How do you deal with the then-current market value versus the already paid portion? This would require two sets of books: The tax paid amount and the market value. It would also require frequent repricing of assets, and surely there will be scandals involving the newly powerful appraisers. Then there’s the issue of 2008-style losses; is he planning on issuing refund checks when values decline? The IRS loves one-way money, and this would certainly not be that.
Mr. Biden is seemingly focused on stock values that are known and liquid. But what about real estate whose value is neither known nor liquid? The IRS will become even more bloated with throngs of new lawyers to handle the caseload of challenges. Biden even proposed the IRS making loans on the tax liability (deferral) with interest, of course, for taxes on illiquid property to prevent forced sales. Say goodbye to the family farm when dad dies at 50 and the son inherits at age 20 and lives to age 90. Seventy years of interest will have the IRS owning the farm long ago. Paying more for squash at HEB won’t be Putin’s fault this time. These examples are precisely why the existing rules have stood for over 100 years.
This patchworked proposal reminds me of Frankenstein’s monster – built from a hodgepodge of pieces. The story ends with creator Victor Frankenstein on his deathbed, full of remorse for the monster he created. I’m not so sure Mr. Biden has read the book.
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