For years, politicians have claimed that the rich weren’t paying their “fair share.” While it’s taken a decade or more for voters to catch wind of the truth, people are finally beginning to realize that the rich actually pay far more than the rest of us. According to Congressional Budget Office figures, the average household in the top one percent earns 120 times what the average poor household earns, but pays 2,000 times the taxes. Even after deductions, exemptions, write-offs, income deferrals, and whatever other accounting and legal arcana the rich throw at their tax returns, in the end, the typical one-percenter paid 32% of his income (all sources combined) in 2018 versus 13% for the typical middle class household and almost 0% for the typical poor household.
It’s clear that Americans have figured out the truth about who pays, because politicians are shifting the goalposts. Elizabeth Warren shifted the conversation from what fraction of income the rich paid to what fraction of wealth they paid. President Biden has upped the ante by talking about taxing unrealized capital gains.
This is unprecedented. The federal government has no constitutional authority to tax wealth, and never have unrealized gains been considered income – either in the realm of accounting or economics. An unrealized gain is simply an investment “in process.” What shows up as a gain today can easily turn into a loss tomorrow. Ask anyone who invested in Bitcoin in March 2021, or gold in August 2011, or housing in 2007. An investment’s tale isn’t told until the investor cashes out. Unrealized gains aren’t gains. They are hypotheticals.
What politicians want is to foment class warfare. If they can get the middle class and poor to resent the rich, those same politicians can expand the scope of federal taxation into areas it has never before touched.
But watch out. Politicians are only partially interested in the rich. They are very interested in the middle class. In 2018, middle and upper middle class households, combined, earned double what the top one percent earned. And the federal government currently taxes the middle classes at rates less than half of what it taxes the one percent. Politicians see the middle class as a largely untapped revenue source.
While President Biden says that a tax on unrealized gains would apply only to billionaires, once instituted, there is nothing stopping the government from applying it to everyone else. If it did so, the middle class would find itself awash in taxation. Most middle class wealth is tied up in home values. The median sale price of existing homes shot up 14 percent just in the past year. If the government applied an unrealized capital gains tax to all homeowners, the median homeowner would get socked with a $7,000 tax bill. And that’s for just one year. The value of the median home rises more than 3.5 percent per year. At current capital gains tax rates, the median worker would get hit with an additional $1,500 federal tax each year simply because his home was, on paper, worth more than the year before. The average 401K or IRA account is worth $135,000. Given stock market gains last year, the average saver would have seen around $13,000 in unrealized capital gains – and a $2,000 tax bill if those unrealized gains were taxed.
And what of higher education? The typical four-year college graduate earns over 60 percent more than the typical worker with only a high school education. Currently, the median difference is over $500 per week. Over a 40 year career, that wage difference adds up to more than $1 million. Should that be taxed?
The college graduate has made an investment in his education that has increased his expected future earnings by $1 million. Of course, the graduate hasn’t earned that money yet. But that simply makes it an unrealized gain. If the government can tax other investments before their gains materialize, why can’t it tax the graduate’s increased income before it materializes? The tax bill there, by the way, would be around $150,000.
What’s really going on is that politicians see a coming fiscal storm, and they are desperate to find new sources of revenue before it hits. The Congressional Budget Office estimates that by 2031 the federal debt will have reached almost $36 trillion. Historically, the CBO’s ten-year debt projections have underestimated future debt by more than a factor of two. If the CBO’s current estimate is off by that same factor, the debt will actually be over $80 trillion by 2031. That’s equivalent to running a $5 trillion deficit each year over the next decade. While that sounds unbelievable, it’s consistent with what we’ve seen in the past. Since the late 1960s, the federal debt has grown at an average annual rate of almost 9 percent. If the debt continues to grow at that historical average, by the end of the decade, it will be more than $65 trillion. That’s equivalent to running a $3.5 trillion deficit each over the next decade. For comparison, the federal government collected $3.4 trillion in taxes in 2020.
Federal spending is out of control. Politicians know it and they know that they can’t stop it.
Those same politicians have realized that raising taxes isn’t enough. They need new sources of tax revenue that haven’t existed before. Their first step is to institute new taxes on wealth and unrealized capital gains. Once established, their next step will be to expand those taxes to the middle class.
A day of reckoning is coming. Politicians hope that we’ll keep pointing fingers at the rich so we don’t notice who the real culprits are.