Oregon Democratic Sen. Ron Wyden, a ranking member on the influential Senate Finance Committee, announced this week he is developing a new way to tax the wealthy – aimed at overhauling the capital gains tax structure.
Capital gains taxes are currently paid on the difference between what an individual originally paid for a property or investment and what she sold it for – at the time it is sold.
The current top capital gains rate sits at 23.8 percent. The highest income bracket tax rate, by contrast, is 37 percent.
Wyden is proposing that unrealized capital gains are taxed annually – meaning that these assets are taxed each year their value appreciates even if the owner does not sell them. Under his proposal, they would be taxed at ordinary income rates – meaning the top rate would increase to that 37 percent level, from less than 24 percent.
Economists often refer to this type of proposal as “mark-to-market.”
Wyden, who is proposing the change as a means to combat inequality, said in a statement that the mark-to-market approach would eliminate “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.”
He is expected to release a white paper outlining the idea.
The Congressional Budget Office has estimated that more than 90 percent of the benefits from the reduced capital gains rate accrue to households in the highest income quintile.
Republicans, however, are likely to vehemently oppose the plan. Republican Sen. Pat Toomey of Pennsylvania called the proposal a “breathtakingly terrible idea,” as reported by The Wall Street Journal.
Chris Edwards, director of tax policy studies at the Cato Institute and editor of www.DownsizingGovernment.org – who opposes the measure – said there are a number of economic reasons why capital gains have been subject to different tax rules.
“Low capital gains taxes mitigate the harmful effects of inflation and encourage investment in risky start-ups and growth companies,” Edwards told FOX Business. “Silicon Valley crucially depends upon investors waiting patiently for years as their risky investments in growth companies to pay off with a realized capital gain.”
He also says many investors do not have the liquidity to pay taxes on the assets annually as they appreciate in value.
Microsoft co-founder Bill Gates, one of the world’s wealthiest men, has cautioned against support for some of the Democratic party’s more progressive tax proposals – including freshman New York Rep. Alexandria Ocasio-Cortez’s 70 percent income tax. He has, however, called for reforms to the capital gains tax structure.
“The big fortunes, if your goal is to go after those, you have to take the capital gains tax, which is far lower at like 20 percent, and increase that,” Gates said on CNN in February.
Taxing capital gains income and ordinary income at the same rate “would get rid of a lot of complexity, because whenever those rates vary, you want to make one look like the other,” he said.
Wyden follows a host of others in his party with plans to tax the wealthy as a means of combating income and wealth inequality.
Massachusetts Sen. Elizabeth Warren – a declared 2020 hopeful – has proposed an “ultra-millionaires tax” on people with assets in excess of $50 million, for example.
Another 2020 contender, Independent Vermont Sen. Bernie Sanders, wants to expand the estate tax rate to 77 percent for people passing on assets in excess of $1 billion.
It should be noted that Wyden could become head to the Senate Finance Committee should Republicans lose their majority.