I was going to do a roundup of everything we know about the terrible policy proposal to tax unrealized capital gains. However, the news is changing so fast that it is hard to know which aspect of the Democrats’ plan to pay for their spending bills is worth writing about. As the WSJ notes:
One day it’s an increase in tax rates on corporations and the affluent. But wait, that doesn’t have the votes. How about a carbon tax? That won’t fly either. Hey, there goes Jeff Bezos. Let’s tax him and 699 other billionaires. It polls well. Everyone hates billionaires!
Oh, but that may be unconstitutional. We still need money, so let’s try a 15% corporate minimum tax—though be sure to exempt investments in green energy and other pet progressive ideas. So it will have to be a minimum tax on some companies but not others.
But there is more. The NYT’s DealBook newsletter this morning announced that “‘Super-rate brackets’ may be the next attempt to tax the uber-rich, according to Punchbowl News. This would create higher taxes for incomes over a certain amount — 5 percent extra on incomes above $10 million and another 3 percent on incomes above $25 million. This idea is still under negotiation and may not materialize with these details, if at all.”
If you are worried that the frenzy won’t give us the best economic policy, do not read this piece in the NYT with the not-so-reassuring title “Hunting for Money, Democrats Rush to Rewrite The Tax Code.” Also, you may want to skip the next paragraph:
As they hunt for revenue to pay for their sprawling spending bill and try to unite a fractured caucus, Democrats are attempting to rewrite the United States tax code in a matter of days, proposing the kind of sweeping changes to how America taxes businesses and individuals that would normally take months or years to enact.
The effort has effectively discarded trillions of dollars of carefully crafted tax increases that President Biden proposed on the campaign trail and that top Democrats have rolled out in Congress. Instead, lawmakers are throwing a slew of new proposals into the mix, including a tax on billionaires, hoping that they can pass muster both legally and within their own party.
In this context, we shouldn’t be surprised that the new framework released by President Biden still needs a lot of work including a plan to pay for it.
Now, one last thing. Democrats are obsessed with raising taxes on capital. And somehow, they still haven’t admitted that it is a terrible idea — taxing unrealized capital gains being the craziest of them all. As Chris Edwards notes:
Many high‐income countries in Europe and elsewhere have heavier overall tax burdens than we do, but they make up the difference with high taxes on consumption, not capital. These countries recognize that taxes on consumption, such as value‐added taxes (VATs), are less damaging than taxes on capital.
In other words, in their commitment to building a massive government, Europeans seem to have grasped better than Americans economics’ No. 1 insight: Incentives matter. It boils down to this: Don’t ignore the many ways in which taking money from A to give it to B, or to fund a bridge or a war machine, will create adverse incentives, and hence, backfire. And when it comes to disincentives, some tax schemes are not created equal, and capital taxes are an incredibly inefficient way to raise money, for expenditure or for redistribution. It generates a ton of avoidance (and administrative nightmares), and they do a lot of economic damage per dollar raised. Again Edwards is right:
The Democrats are steering America to a worse place than Europe—a place where the private sector is undermined by expansive welfare programs, and where the programs are funded by taxes on capital rather than VATs. I am against a VAT for the United States because I favor smaller government, but I worry that the Democrats want to impose bigger government funded in an even more damaging manner than big European governments.
It seems like a good time for me to plug my favorite policy: Cut spending and embrace fiscal prudence.
Why are Democrats obsessed with capital taxes? In part, they may have convinced themselves that, against all proof to the contrary, the rich pay lower taxes than regular people. But I assume it is also because it is politically easier to sell big spending plans when you can pretend that most people won’t pay for it because the rich will.
For others, though, the obsession with taxing capital is about destroying the allegedly growing political power of the billionaire class (though I wonder which billionaires they are worried about; George Soros? Bill Gate? Tom Steyer?) — along with their influence in our lives in general (Zuckerberg? Elon Musk?). In other words, the distortions and destruction of wealth is the goal, not the unintended consequence of a redistributive scheme. Along these lines, these taxes are also a way to reduce the incentive to become rich. That would explain why some progressives are so comfortable with the evidence that capital and wealth taxes don’t raise a lot of revenue.
In any case, here are a few of the best pieces I have read on Wyden’s proposal to tax unrealized capital gains. I know it is supposedly dead but this is Washington, D.C., and bad ideas have a way of never truly dying.
The piece that David Bahnsen did for NR a couple of years ago.
Noah Rothman’s piece over at Commentary.
Tyler Cowen had two very good posts here — at the link you will find this sentence: “Here is much more from Aswath Damodaran, devastating throughout” — and here.
Dan Mitchell at International Liberty.
My favorite was sent by a friend who suggested a Straussian reading of the true motive behind the Wyden plan:
Thesis: it’s not really about “left vs right” it’s about “east coast vs west coast.” Those hardest hit by this would be to a large degree the threats to east coast power that both parties want to take down a few pegs. Bezos, Musk, etc.