Taxing Unrealized Capital Gains Would Be Difficult and Pointless

A blog about business and economics.
Feb. 8 2012 10:33 AM

Taxing Unrealized Capital Gains Would Be Difficult and Pointless

If you own 10 percent of a brand new company, and then over the course of a few years that company turns out to be worth billions of dollars, it's conventional to say that you've "made" hundreds of millions of dollars during that time. But these earnings are capital gains, and we don't tax capital gains that are purely hypothetical. It's only if you actually sell a financial asset that your capital gains become taxable. In today's New York Times, tax attorney David Miller says this is a bad idea and we should subject unrealized capital gains to taxation on a mark-to-market basis. 

This seems to me like it would be a huge hassle (possibly part of the appeal to a tax lawyer) with relatively little upside. The logistics of taxing people on notional earnings would be very complicated. So complicated, in fact, that Miller sensibly wants to exempt the vast majority of people from needing to bother. Instead, his proposed tax is limited to "individuals and married couples who earn, say, more than $2.2 million in income, or own $5.7 million or more in publicly traded securities." Attempting to raise more revenue from households in the top 0.1 percent of the income distribution makes sense on the grounds that these people have a lot of money, but insofar as the goal is to create a brand-new high end tax I don't see any particular reason to favor this strategy. Consider as an alternate the reverse proposal—a tax on the consumption of the richest households. The consumption tax, as applied to extremely rich people, in effect discourages high living and encourages people to offload more of their fortune into philanthropy. The tax on unrealized capital gains does the reverse, telling Bill Gates he may as well liquidate his financial holdings and start stockpiling yachts.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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