By Owen Klinsky
Vice President Kamala Harris’ proposal to tax increases in the value of assets before they are sold is an “economic doomsday device” that could send shockwaves through the businesses and institutions that average Americans rely on, experts told the Daily Caller News Foundation.
In August, Harris’s campaign said that she supported President Joe Biden’s fiscal year 2025 tax proposals, including a 25% tax on unrealized capital gains for individuals worth $100 million or more. While the policy is intended to reduce wealth inequality and raise additional tax revenues, it risks causing a mass sell-off of assets by owners looking to avoid the tax, hurting businesses’ ability to operate, and, consequently, crushing the retirement plans and the economic well-being of average Americans, economists told the DCNF. (RELATED: Kamala Harris Voted Against Trump-Era Bill That Expanded Child Tax Credits She Champions)
“All economic groups of American society — the poor, the working class, the middle class, the wealthy, the ultrawealthy — would be severely injured economically by compelling the liquidation of securities, real estate, collectables, business interests, and intellectual property,” Peter Earle, senior economist at the American Institute for Economic Research, told the DCNF. “Such a tax would not only devastate anyone with any proximity to the business world — employees, managers, owners, executives, etc. — but investors, consumers, and global trading partners as well.”
Kamala Harris favors a tax on unrealized capital gains. That means many farmers and small business owners will owe taxes without having the cash to pay for them, triggering forced sales of assets. There’s no better way to trigger a second Great Depression. pic.twitter.com/AVgV198XYf
— Vivek Ramaswamy (@VivekGRamaswamy) August 25, 2024
The proposal would require individuals with a net worth of $100 million or more to pay a 25% tax on their “total income,” including unrealized capital gains, if they have 80% or more of their wealth in tradeable assets and do not already pay 25% on that total income, according to Biden’s fiscal year 2025 tax proposals. Net worth calculations would be conducted by the Internal Revenue Service (IRS) and would assess the wealth of individuals as of Dec. 31 of the given year.
In practice, a tax on unrealized gains could lead to investors rushing to sell assets to avoid the tax, with the practice known as “fire sales” and, as a result, depressing the value of assets like stocks and homes, E.J. Antoni, a research fellow at the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget, told the DCNF.
56% of middle-class families owned stock as of 2019, with the majority owning the stock indirectly through financial products like mutual funds, index funds and retirement accounts, according to USA Facts. Home equity accounted for a median of 45% of U.S. homeowners’ net worth in 2021, according to the Pew Research Center.
“The proposal to evaluate wealth on December 31 also creates a massive problem in the form of a predictable collapse in asset prices at the end of every year as people try to evade the tax via fire sale pricing,” Antoni told the DCNF.
Antoni also claimed Harris’s proposal would cause a decline in investment and innovation, which would mean less economic growth and increases in productivity, weighing down the economic prospects of all Americans.
“Taxing unrealized capital gains would cause a tremendous amount of economic harm,” Antoni told the DCNF. “It would negatively impact investment — the driver of economic growth — by disincentivizing those ventures with the best returns on investment. Lower growth hurts everyone … [and] lower returns on investment also directly hurt the middle class since their retirement vehicles typically depend on the performance of things like equities.”
A December 2023 analysis of data from 37 countries published in the European Journal of Government and Economics found investment causes growth in gross domestic product (GDP) as well as the maximum amount of goods and services a country is able to produce. Falling GDP and productive capacity often mean layoffs, falling incomes and a reduction in the amount of goods and services households have access to, according to the Bank of England.
Meanwhile, productivity growth is essential for reducing poverty as it allows workers to produce more with their labor and thus receive higher incomes for the same amount of work, according to the World Bank.
“The core economic cost comes from massively taxing investment in risky leading-edge activities,” Adam Michel, director of tax policy studies at the Cato Institute, told the DCNF. “Such a tax increase would encourage investors to put their money in safer investments, such as government bonds, rather than new innovative industries, like new energy sources, biopharmaceuticals, or AI. It is this type of risky, innovative investment that drives the type of economic growth that allows all Americans — including the middle class — to be more productive, earn higher wages, and have access to better products at lower prices year after year.”
On top of a plummet in asset values and investment, Earle also believes a tax on unrealized capital gains would result in assets being moved out of the country “on an unprecedented scale.”
“Assets that could be transferred out of the United States would be, ownership of larger fixed assets would be transferred to domiciles outside the reach of the U.S. tax code, and anything outside of those categories would be liquidated,” Earle told the DCNF. “It would be a shift of such tremendous proportions that any effort to predict all of the knock-on effects is bound to underestimate.”
Capital flight driven by a wealth tax would not be unprecedented, with a 1989 French wealth tax on assets worth more than €800,000 resulting in €200 billion worth of capital flight and the exodus of 40,000 millionaires between 1989 and 2007, according to French economist Eric Pichet. The sudden departure of large quantities of assets can cause asset devaluation, a loss of government tax revenues and create panic, causing more people to move their money abroad, according to the Corporate Finance Institute.
“A tax on unrealized capital gains, such as it has been described, is an economic doomsday device,” Earle told the DCNF.
The tax could also feature a number of practical enforcement issues, such as the government being obligated to rebate unrealized losses, which would create significant administrative burdens and leave the federal government’s budget in constant flux, according to the Cato Institute. For example, when Elon Musk’s net worth fell $182 billion in 2022, the government would have owed him a rebate of $45 billion.
Another enforceability concern surrounds wealth calculation, with Antoni telling the DCNF that “calculating wealth can be incredibly difficult in many circumstances, especially when the numbers are large,” adding that, “if wealth was so clearly defined and calculable, then the case never could have been brought against Trump for fraud regarding real estate valuations.”
“Valuing non-regularly tradeable assets — like artwork and privately held businesses — is exceedingly difficult,” Michel told the DCNF. “It took 12 years for the IRS and the estate of Michael Jackson to reach a court-mediated agreement on the value of the estate’s assets, which included a bunch of these hard-to-value assets. A system that must first determine who is eligible for the tax and then assess changes in value every year will require lots of really complex (and easy to game) rules and a dramatically expanded IRS.”
The Harris campaign did not respond to requests for comment from the DCNF.
