WASHINGTON—If next February Democrats control the presidency and both houses of Congress—this is neither probable nor highly improbable—the legislative branch’s most consequential member might be chairman of the Senate Finance Committee.
Oregon’s Ron Wyden, 70, and in his fifth term, understands the patience that politics both requires and rewards. He is spending 2020 tilling the political soil in Congress and the private sector to earn at least a hearing for a momentous proposal: taxation of unrealized capital gains.
His contention is implied by the title of his explanatory booklet, “Treat Wealth Like Wages.” Wage earners pay taxes as they earn. Those whose wealth is in the form of capital should pay taxes on it as it appreciates. And as a necessary corollary, they should be able to deduct losses on held assets that have declined in value.
Wyden, whose proposal would apply only to those with more than $1 million in annual income or $10 million in assets for three consecutive years, says that 72% of realized capital gains go to taxpayers with annual incomes of more than $500,000; that in 2018 almost 70% of realized capital gains went to the wealthiest 1%; and that more than 50% went to the wealthiest 0.1%. Because capital gains on assets passed to heirs upon death are not taxed, an asset bought for $250,000 that has appreciated to $10 million when the owner died will not be taxed on the $9.75 million capital gain.
Furthermore, Wyden argues that an unrealized capital gain is not an unused gain: It can be collateral for borrowing that enables the borrower to spend and invest without tapping savings.
Melding his proposal with government’s most popular undertaking, the revenue raised by taxing unrealized capital gains would, Wyden says, be dedicated to Social Security. This is not, however, a momentous idea. Arithmetic says Social Security benefits must be cut about 20% when, in 2035 at the latest, the trust fund is projected to be exhausted. Politics guarantees that this cut will not happen: Money infusions will be forthcoming, with or without Wyden’s measure.
Possible problems with Wyden’s proposal include: How do you value transferred assets such as illiquid real estate, businesses and venture capital? Compliance costs might be steep, particularly when the wealthiest Americans’ lawyers and accountants set about gaming the system. (Wyden has done some anti-gaming exercises.) And what Wyden considers a major inequity could be cured simply by ending the exclusion of capital gains taxation at death. Furthermore, many economists across the political spectrum argue that the current treatment of capital gains encourages risk-taking, aka investment, and economic growth.
Wyden, however, is a true progressive, serenely confident about undertaking major alterations of complex systems. This is today’s context:
In the Trump administration’s first three years, the government’s average annual revenue increase was 2.6% (the preceding administration’s: 3.9%), spending has increased 5.7% per year (preceding administration: 2.6%) and the deficit has grown 20.8% per year (preceding administration: 9.4% average annual decline). In three years the current administration has added more to the national debt ($2.6 trillion) than the preceding administration did in four years ($2.1 trillion).
The $1.02 trillion federal deficit for calendar 2019 (up 17.1% over 2018, which was up 28.2% over 2017) occurred with economic growth about as brisk as can be prudently projected (2.3%), and at full employment. This is redundant evidence that the nation is more threatened by consensus than by discord, as follows:
America has an aging population and an entitlement system (principally Social Security and Medicare) into which 10,000 baby boomers retire daily. It has a political class ideologically quarrelsome but operationally united by a shared incentive arising from a shared understanding. The class understands that are only two ways to finance government, present taxes and future taxes. The class has a political incentive to enlarge as much as possible the latter’s role in fiscal planning.
America cannot, however, forever fund the government it has chosen to have with the tax code it has, the domestic promises it has made and the defenses it needs. In fiscal 2019, taxes raised revenues equaling 16.3% of GDP and the government spent a sum equal to 21% of GDP. Higher tax rates and/or new taxes (e.g., on carbon) are coming.
The Democratic Party and an American majority believe the wealthy should pay higher taxes. The Republican Party believes ... well, whatever today’s president says it believes. In its current plasticity, will it stand athwart this majority yelling “Stop”? Wyden has a proposal, and patience, and plastic opponents.
(Write to George Will at firstname.lastname@example.org)
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