(The Gazette) - A Democratic plan to counter inequality by taxing unrealized capital gains of billionaires could harm the growth of companies and imperil their founders' influence.
The plan, just one on a menu of options being formulated by Senate Finance Committee Chairman Ron Wyden to pay for Democrats' multitrillion-dollar infrastructure and social spending plan, has garnered the support of President Joe Biden but comes with several unanswered questions and challenges.
While exact details about the plan have not been released, the idea would be to tax annually the unrealized capital gains of individuals whose wealth exceeds $1 billion.
The plan is something that Wyden, who represents Oregon, has been toying around with for years. Legislative text that will include details such as the tax rate is still forthcoming, a Finance Committee spokesperson told the Washington Examiner.
The plan differs from the current tax regime in that gains would be taxed even if they are not realized. Today, billionaires whose investments grow in value are taxed on those increases, known as capital gains, when assets are sold.
The new tax would apply to tradeable assets like stocks, the spokesperson said, and not nontradeable assets like real estate or closely held companies.
Many liberals have sought new forms of capital gains or wealth taxes as a means of taxing the very wealthy, who generally accrue fortunes through investments rather than through salaries. The tax would hit the ultrawealthy, but it could also have an effect on businesses. A concern among some economists and tax advocates is that under the plan, if a billionaire saw large unrealized capital gains one year, they might need to liquidate assets in order to pay that tax bill.
For example, say that an entrepreneur invested $80,000 of his own money into a majority of the shares of a public company he started. The entrepreneur's startup soon takes off and the value of his shares balloons to $1.5 billion. Because he is technically a billionaire, he may be taxed on gains of his company's stock under the plan. But, although worth more than $1 billion because of the stock, the entrepreneur has little cash or savings.
Given that the entrepreneur doesn't have enough money held in other forms to cover a massive tax bill, the entrepreneur could be forced to liquidate shares of the company to pay the IRS, which would wrest away his majority control and damage the value of the startup — thus hitting all of the company's employees downstream.
"You're going to be discouraging very successful business owners in terms of their control of their company," Dean Zerbe, national managing director of alliantgroup, told the Washington Examiner. He noted that having a tax on billionaires, which would hit the founders and innovators of many companies, might end up discouraging business formation.
Zerbe said that lawmakers like to highlight when billionaires' net worth increases by hundreds of millions of dollars in a short period of time, but very little is discussed when a company's stock goes south and a billionaire suffers hundreds of millions in unrealized losses.
Robert Hoberman, managing partner at New York City accounting firm Hoberman & Lesser, told the Washington Examiner that the undertaking would harm businesses by hamstringing CEOs.
"You would be systematically forcing them to reduce their holdings because they would have to raise the money from somewhere," Hoberman said. "Eventually, you would wind up that these people could no longer be in control of their companies. Part of the things that have made these companies so valuable is that it's really one person's vision on how to get things done."
"When these people are no longer in control, it could seriously affect the value of these companies," he added.
Rep. Kevin Brady, the top Republican on the Ways and Means Committee, blasted the notion of taxing billionaires' unrealized gains during an interview with the Washington Examiner. He called the notion "unworkable to say the least" and a "terrible economic policy."
"It punishes the hard work and the long-term investment it takes to build your American dream," the Texas Republican said. "[Democrats] are obsessed with punishing the successful … It's a huge mistake to discourage people of any income to pursue the American dream."
Some tax experts fear that taxing the unrealized gains of billionaires would be detrimental to the U.S. economy globally, especially given how complex international taxation is and how many tax advisers are out there to help billionaires safeguard their wealth.
The IRS would likely have to hire a host of new agents tasked with combing through the tangled web of billionaires' holdings.
Garrett Watson, senior policy analyst at the Tax Foundation, told the Washington Examiner that the tax would incentivize people subject to the tax to shift a lot of their wealth into asset classes that are not subject to the tax.
Democrats are also facing the prospect of how to handle losses. In a situation where a billionaire suffers capital losses, the government could be forced to cut checks to them.
Democrats could permit deductions for those losses in addition to imposing limits on those deductions. They could also allow them to carry forward to offset future gains, according to the Wall Street Journal.
The Wyden plan has been touted by some on the left who have advocated for wealth taxes. The left-leaning group Americans for Tax Fairness pointed out in an information sheet about the plan that most of the income of billionaires comes in the form of capital gains and they can avoid paying taxes by borrowing money at low rates instead of realizing gains.
Regardless, Democrats are struggling to come up with tax proposals that are amenable to the more centrist members of their party, whom they need to vote on the spending package. While they can afford to lose a few votes in the House, Democrats need every senator's vote in order to bypass the GOP filibuster and approve the legislation through reconciliation.
Other measures that Biden proposed have already been pared down from their initial levels to appease centrists. Biden's 28% corporate tax pitch now sits at 26.5%, and a plan to nearly double the capital gains rate for the highest earners also came in lower than proposed.