Many Americans’ retirement accounts have taken a major hit due to COVID-19 shutdowns, as the Dow Jones is down 5,000 points from late February. But what many do not know is that the struggling stock market reveals a major flaw in Democrats’ tax plan that could become law if Joe Biden wins the presidency: Mark to Market taxation of capital gains.
This proposal would assess and tax the value of assets yearly for anyone who makes more than $1 million. Under current law, assets, such as stocks, are only taxed when they are sold or “realized.” But with a struggling stock market, all this proposed policy would do is give wealthy Americans a massive tax write-off for losses that they have not actually incurred.
Jeff Bezos reportedly lost about $18 billion last March due to changes in Amazon’s stock price. Democrats’ policy would allow Bezos to take a $18 billion tax deduction on his capital gains if the assessment period ended, even though he did not actually lose any money. If his net losses exceeded $3,000, he could carry forward these losses to future years and possibly avoid paying any capital gains taxes for years to come, which defeats the policy’s stated goal of taxing the wealthy.
Even though Mark to Market is traditionally thought of as “progressive tax policy,” it is regressive during an economic crisis. Wealthy Americans get a massive tax write-off even if they don’t lose any real income.
This deduction is not a flaw of Mark to Market, it is a feature of the policy because the tax code rightly includes deductions for capital losses and allows these losses to be carried forward to reduce the tax code’s bias against risk.
Allowing capital losses to be carried forward leads to overall higher economic growth by increasing investment. Yet under a Mark to Market system, the tax code would not reflect the real losses or gains of investors, distorting the market by raising the cost of capital.
If this policy became law, the federal deficit would also be more than the current $3.7 trillion. Tax revenue — especially capital gains revenue — is sensitive to the state of the economy, and revenue decreases during economic downturns. But with Mark to Market, essentially no wealthy Americans would pay any taxes on their capital gains.
This deficit increase would not help pay for smart economic policy to stimulate an economic recovery, such as policies designed to increase business investment or keep workers employed. It is just lost revenue that increases the debt due to a policy that does not accurately reflect the losses of investors.
Democrat Sen. Ron Wyden, the ranking member of the Senate Finance Committee, released a detailed Mark to Market proposal in 2019. This could become the framework of any Democrat tax plan, similar to how Paul Ryan’s “Better Way Plan” became the blueprint for the 2017 tax cuts. Elizabeth Warren and others also proposed Mark to Market taxation of capital gains during their presidential campaigns.
There is a buffet of other problems with this policy. Mark to Market also attempts to value and then tax non-traditional assets owned by the wealthy. Attempts to value non-traditional assets, such as art collections or yachts, would be a complicated mess worse than any property tax assessment that Americans are commonly used to.
This policy would encourage the wealthy to consume instead of invest to avoid a higher tax burden. The wealthiest of Americans could very easily buy a $10 million dog house or a tiger, as “Tiger King” showed us, and an assessor would value these items as worthless since nobody would buy them.
So instead of investing in the stock market or in a company, using their wealth to employ more non-wealthy people, rich Americans would be more likely to make these wasteful purchases to avoid the Mark to Market policy taxing them on earnings before they liquefy them. All Americans would pay for this choice through lower economic growth, and the elderly would be especially harmed by this distortion through a lower return on their retirement savings.
Just because the value of an asset has increased does not mean someone has money available to pay an increased tax on its higher valuation. This policy would distort financial markets by forcing investors to sell just to pay the tax. Increasing capital gains taxes would discourage Americans from saving, which decreases the amount of money available for investments and leads to lower economic growth.
The flaws of Mark to Market taxation of capital gains are greatest during an economic crisis like the one we’re facing now. Americans don’t want a policy that allows the wealthy to avoid paying capital gains taxes for years during economic downturns when normal Americans are struggling to pay their bills.