Sen. Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, wants to change the way capital gains are taxed by imposing an annual levy on investments.
How it would work: While Wyden said details would come at a future date, the general idea is that investors would pay a tax based on valuations of their holdings each year, with all annual gains treated like income – even gains that have not been realized. This “mark-to-market” approach would tax all capital gains at a maximum rate of 37 percent.
How it works now: Currently, capital gains are taxed only when an asset is sold. Year-to-year increases in value are not taxed, as long as an investor continues to own a given asset, and in some cases, assets can pass to descendants without ever being taxed. When gains are realized, they are taxed at a special, lower rate that tops out at 23.8 percent.
Who would be affected: Capital gains are concentrated in high-income households. According to the Tax Policy Center, “In 2016, capital gains were 46.4% of adjusted gross income (AGI) for those with AGI over $10 million, compared to 0.7% for those with AGI under $100,000.”
Why the change? In a statement Tuesday, Wyden framed the proposal as a way to reduce wealth inequality:
“There are two tax codes in America. The first is for nurses, police officers and factory workers—those who earn wages and pay taxes with every paycheck. The second is for millionaires and billionaires—those who use their wealth to build more wealth, paying what they want, when they want.
Everyone needs to pay their fair share and the best approach to achieving that goal is a mark-to-market system that would require the wealthy to pay taxes on their gains every year at the same rates all other income is taxed. This eliminates serious loopholes that allow some to pay a lower rate than wage earners, to delay their taxes indefinitely, and in some cases, to avoid paying tax at all.”
What the critics are saying: Most agree that the proposal has little chance of passing any time soon, but it clearly would represent a significant change for the way wealth is taxed in the U.S. Lily Batchelder of NYU Law School tweeted, “Wow, this is a game changer” that would raise “a huge amount of revenue from the wealthy.” Her colleague David Kamin agreed, saying the proposal “has potential to raise significant $$ and make it much harder for those at the top to avoid taxes.” But he also pointed to important, potentially thorny issues, such as how annual volatility would be treated and how non-liquid assets would be valued.
David Miller, a tax lawyer, told Bloomberg that in his estimate, a mark-to-market capital gains tax on the wealthiest households could raise hundreds of billions of dollars of revenue over 10 years.
But the opposition to such a system would no doubt be intense. Sen. Pat Toomey (R-PA) dismissed the proposal as a “breathtakingly terrible idea,” and said it would go nowhere as long as Republicans were in a position to stop it.