Harris Is in Favor of Taxing Unrealized Gains, Raising Debate

Under a new proposal, individuals with a net worth exceeding $100 million would be required to pay a minimum effective tax rate of 25%.

Vice President Kamala Harris, as part of her campaign platform, has advocated for taxing unrealized capital gains from assets like stocks and bonds. This proposal, though not entirely new, has faced resistance from both parties, with some critics raising concerns about its constitutionality.

As the Democratic presidential candidate, Harris supports President Joe Biden's tax hikes included in the fiscal year 2025 budget, which also suggests taxing unrealized capital gains for those with a net worth above $100 million.

However, many believe that the proposal has slim chances of passing through Congress.

Garrett Watson, a senior policy analyst at the Tax Foundation, commented that the plan is intricate and requires more specifics to function properly. A key challenge involves handling illiquid assets, such as private businesses, that are difficult to evaluate. The IRS would need to determine valuations to ensure correct tax payments.

Another complication is that the government would need to refund investors for losses. Watson pointed out that during economic downturns, when gains become losses, the government would have to issue refunds—essentially writing checks to billionaires, which doesn’t look good optically.

Harris argues that her policies will foster what she calls an "opportunity economy" for middle-class Americans. Typically, investors are taxed on profits from stocks or other assets only when they sell them, but Harris and her supporters believe unrealized gains should be taxed earlier. This is particularly relevant because, upon an investor's death, the "step-up in basis" provision allows heirs to adjust an asset's value to its fair market value, thereby minimizing or avoiding taxes.

The Institute on Taxation and Economic Policy (ITEP), a left-leaning think tank, supports taxing unrealized capital gains, arguing that it reduces a significant tax break for the wealthy. Steve Wamhoff, ITEP's federal policy director, argued that the current tax code favors the extremely wealthy, who are more likely to earn income through investments rather than wages, unlike the average person who pays taxes as they earn.

In contrast, former President Donald Trump criticized the plan, suggesting it would force wealthy business owners to sell their companies to pay taxes and that it could drive wealthy individuals and corporations out of the United States. He also expressed concern about potential future expansions of the tax under different administrations.

Adam Michel of the Cato Institute warned that Harris's proposal sets a dangerous precedent, opening the door to more aggressive tax hikes that could stifle investment, innovation, and economic growth.

Supporters of the tax argue that income should be defined as both wages and changes in net worth, including unrealized gains. The new proposal would impose a 25% minimum effective tax rate on those with a net worth above $100 million, including their unrealized capital gains. If their effective tax rate falls below this threshold, they would owe additional taxes to meet the 25% rate, payable over several years.