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capital gains
What Would Be a Truly Fair Way to Tax Capital Gains?
The Billionaires Income Tax proposal that Sen. Ron Wyden (D-Ore.) introduced last year would require billionaires to pay tax annually on the growth in their wealth—in the same way the rest of us pay tax on our salaries and wages.
Feb 19, 2025
America’s policymakers have been debating for decades now the fairness of the preferential tax rate for capital gains. The maximum federal income tax rate applicable to long-term capital gains currently sits a whopping 17 percentage points lower than the maximum rate applicable to ordinary income: 20% on long-term gains versus 37% on ordinary income.
Let’s note here at the outset that both ordinary income and capital gains may be subject to federal employment tax or the net investment income tax. But including those additional taxes does not change the essential tax-time gap between ordinary and capital gains income. So, for simplicity’s sake, let’s just here consider the gap between the 20 and 37% rates.
Eliminating the preferential rate for capital gains, many analysts maintain, would finally place investment income and wages on an equal footing tax-wise. But would that actually be the case? Unfortunately, no. Simply equalizing the basic tax rates on ordinary and capital gains income would leave in place the gaping “buy-hold for decades-sell” loophole.
If you had to choose between paying tax at 10% annually or paying 10% every 10 years, would you consider those two rates equal?
The framing of the debate over the current preferential treatment for capital gains makes this loophole quite difficult to notice. And that same framing leaves us accepting, incorrectly, the implied premise that the low nominal tax rate rich investors pay on their capital gains—barely half the rate applicable to other types of income—accurately describes the tax rate in an economic sense.
If we continue to focus solely on whether the 20% rate applied to billionaire gains should be raised to 37%, in other words, we won’t be questioning that accuracy.
A similar phenomenon arises when we’re discussing billionaire wealth. Most of us see the obscene fortunes of the world’s billionaires, as reported by Forbes and Bloomberg, and seldom consider the possibility that many of those fortunes may actually be higher than the published estimates. But think a moment: If you held a billion-dollar fortune and wanted to keep your tax bill as low as possible, would you want policymakers knowing the full extent of your wealth? Of course not.
But most of the rest of us don’t ask that question. We see a deep pocket’s wealth estimated at, say, $50 billion—about 50,000 times more than our own $100,000 net worth—and the last thought to enter our minds would be that this deep pocket’s wealth might really stand at $75 billion.
Just as the bloated level of estimates of billionaire fortunes causes us not to consider the possibility those fortunes may be actually even larger, the low tax rate nominally applicable to capital gains income leaves us unlikely to fully compare tax rates on ordinary and capital gains income.
The key to understanding how to make better comparisons: taking tax frequency into account.
Most of the income Americans make—wages and salaries, most notably—gets taxed annually. Capital gains, by contrast, get taxed only when the holders of investment assets decide to sell them. That reality turns a simple comparison of the 20% tax rate on capital gains with the 37% top tax rate on ordinary income into an apples-to-oranges comparison.
Or to put things another way: If you had to choose between paying tax at 10% annually or paying 10% every 10 years, would you consider those two rates equal?
We can overcome the difficulty in comparing the tax rates on ordinary and capital gains income once we begin to understand why we cannot consider these two situations the same.
Consider, for starters, what your tax liability would be if you inadvertently understated your income from a small business on your tax return by $50,000 and then reported the missing income three years later. You would end up paying the IRS not just the tax you should have paid on that income, but an interest charge as well—for deferring the payment of tax beyond the year you earned your income.
For the sake of discussion, let’s say you were required to pay $10,000 in tax and $2,500 in interest. You would then have paid tax at an overall 20% rate.
Now compare that to the situation your rich friend encountered. She invested $50,000 in stocks and held that investment for four years. Say that investment doubled in value, to $100,000, in the first year—the same year you earned the $50,000 of income you failed to report—and then held that value for another three years. If your friend then sold her investment and paid tax at the 20% rate applicable to capital gains, she could claim to have paid tax at the same 20% rate you did.
But would that be accurate? Not really. Economically, your friend has obviously paid tax at a lower rate than you. Yes, you both realized $50,000 of income in the same year and you both paid tax on that income three years later. But you paid a total of $12,500, including interest, while she paid only $10,000.
What happened here? Economically, your friend’s $10,000 tax payment includes a charge for the privilege of deferring the payment of tax. By contrast, our tax system considers your $2,500 deferral charge on your $10,000 obligation a separate item. To make the comparison apples-to-apples, then, we might consider your friend to have paid tax at an effective annual rate of 16%, $8,000, plus a $2,000 deferral fee.
Now consider the case where you received your $50,000 of income—along with additional income necessary to place you in the top marginal tax bracket—in the same year your friend sold her $50,000 investment for $100,000, rather than the year she purchased it.
You would have paid tax on your $50,000 at the marginal rate of 37%, a total of $18,500—and likely have been laser-focused on having had to pay nearly double the tax rate that your ultra-rich friend paid–37% versus 20%—on the same $50,000 of income. In all likelihood, you would at the same time have failed to focus on the reality that the 20% rate applied to your friend’s gain actually overstated the rate she paid in comparison to the rate you paid.
Let’s expand our financial horizon. Say a rich investor purchases an asset for $1 million. Over the next 30 years, that asset grows in value at a steady pace of 10% per year, an average-ish return for a rich American investor. At the end of the 30 years, the asset would be worth about $17,450,000. If the investor then sold the asset and paid tax at 20% on the $16,450,000 gain, a total tax of $3,290,000, he would be left with about $14,160,000.
Suppose instead our investor had to pay tax annually on each year’s investment gains at the rate of just 7.65%. Suppose our investor each year sold a portion of the investment sufficient to pay the tax liability. At the end of the 30 years, the investor will have paid a total of $1,090,000 in tax and be left with the same amount, $14,160,000, that he would have been left with after paying tax at 20% upon a sale in year 30.
Why the $2,200,000 difference between the $3,290,000 total paid when taxed in year 30 and the $1,090,000 total paid when taxed annually? In economic terms, that’s what the investor paid for the privilege of not paying tax until year 30. In other words, interest.
Removing what economically amounts to a charge for the privilege of deferring tax allows us to make an apples-to-apples comparison. The investor effectively has paid tax at a rate of 6.63%. That’s a 30.37 percentage-point difference between the investor’s effective rate of tax and the 37% top tax rate on ordinary income.
How much would that 30.37 percentage-point gap be reduced if the investor’s $16.45 million gain were taxed at a 37% rate when he sold his investment after 30 years? About five percentage points. Of the investor’s 37% nominal tax rate—using the same method of analysis—about 25.34 percentage points would constitute interest, leaving only 11.66 percentage points, economically, as tax.
Should we equalize the tax rates applicable to capital gains and ordinary income? Absolutely. But let’s not kid ourselves. Making that change will not remotely eliminate the preferential tax treatment accorded to capital gains. We need a further change, at least for the billionaire class.
The Billionaires Income Tax proposal that Sen. Ron Wyden (D-Ore.) introduced last year would require billionaires to pay tax annually on the growth in their wealth—in the same way the rest of us pay tax on our salaries and wages. It’s high time to close the “buy-hold for decades-sell” loophole. Sen. Wyden’s Billionaires Income Tax would be one way to do just that.
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How to Cut the Billionaires Behind This Coup Down to Size
The political left in Germany has a plan and strategy for the Elon Musk's of this world and maybe we should be learn from it.
Feb 17, 2025
Americans these days don’t much like billionaires. Our ultra-rich, Americans overwhelmingly believe, aren’t paying enough in taxes. Polling earlier this month found that nearly three-quarters of the nation’s likeliest voters — 74 percent — feel billionaires are paying “too little’ at tax time.
Just how concerned about billion-dollar fortunes have Americans become? Nearly half of us overall, Harris polling found last summer, would like to see a limit on “wealth accumulation.” Among Gen Z’ers, that support for limits on billionaire fortunes runs all the way up to 65 percent.
“Billionaires,” some 58 percent of Americans agreed in that same Harris poll, “are becoming more like dictators.”
The share of Americans equating billionaires with dictators — given Elon Musk’s current dominant role in the new Trump White House — is most likely running even higher today.
The best way to counter our ongoing billionaire coup? We might want to look east for some answers. In the run-up to Germany’s February 23 parliamentary elections, that nation’s Left Party, Die Linke, has proposed a detailed five-step set of initiatives designed to cut the super rich down to democratic size.
“We believe,” the Die Linke co-chair Jan van Aken notes simply in his intro to his party’s new plan, “that there should not be any billionaires.”
But van Aken and Die Linke understand quite well that no government can suddenly snap its fingers and make billionaires disappear. The party has instead melded ideas from all around the world into a coherent and common-sense package.
The Die Linke plan’s step one: restoring a “wealth tax.” Germany has been without one since the nation’s top court nixed the wealth tax in effect back in 1995. The proposed new version would revolve around an annual levy starting at 1 percent on wealth over 1 million euros — the equivalent of about $1.03 million — and rising up to 12 percent on wealth concentrations above a billion euros.
On top of that would come a special one-time wealth tax, also on a graduated scale, that would only impact Germans sitting on fortunes worth more than 2 million euros. This levy’s top rate would hit 30 percent for awesomely affluent Germans in the proposal’s highest wealth bracket.
Germany’s super rich would also see, under the Die Linke plan, a higher inheritance tax on the wealth they leave behind. On the annual income side, top corporate executives and other high-earners would face a 75-percent tax rate on their take-homes over a million euros.
The fifth and final plank of the Die Linke plan: replacing the current 25-percent flat tax on capital gains — the income from the sale of financial and other assets — with a graduated sliding scale of rates.
The overall goal of the Die Linke tax plan: a halving of the wealth of Germany’s wealthiest over the next decade. Three other German parties on the left side of German politics are also backing tax hikes on the wealthy, but at levels not nearly as significant as Die Linke.
Elon Musk’s favorite German party, meanwhile, sees nothing wrong in boosting the fortunes of Germany’s most fortunate. The ultra-far-right Alternative for Germany party, the Musk-backed Alternative für Deutschland, is pledginghigher tax relief for capital gains and an end to Germany’s existing inheritance tax.
Current polling is making the former investment banker Friedrich Merz the favorite to become Germany’s next chancellor. His conservative Christian Democratic Union party favors lowering the corporate tax rate and is now polling support from near 30 percent of Germany’s voters. Polls have the anti-immigrant AfD at a bit over 20 percent.
Die Linke has been rising in the pre-election polling since the party unveiled its tax plan, and the party gained 11,000 new members in January. Analysts now see Die Linke likely to finish with about 6 percent of the overall vote tally, maybe enough to prevent Germany’s right-wingers from forming a new government. But the party’s bold tax plan, either way, has no shot at becoming the law of the land in Germany’s next legislative session.
Still, what seems no more than tax-the-rich pie-in-the-sky in one generation can become actual tax policy in the next. In 1917, for instance, a bold group of American progressives proposed a tax rate of 100 percent on annual income over $100,000, the equivalent of nearly $2.5 million in today’s dollars. A generation later, in 1942, President Franklin Roosevelt asked Congress to place that same 100-percent tax rate on America’s most affluent.
Lawmakers didn’t buy FDR’s 100-percent top rate, but they did pass legislation that had America’s richest facing a 94-percent tax on their top-bracket income by 1944. That U.S. top tax rate would hover around 90 percent for the next two decades, years that would see the United States become the world’s first-ever mass-middle-class nation.
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Here's a Good Topic for Candidates to Debate: Taxing the Filthy Rich
“The wealthiest of the wealthy have figured out how to get richer and richer and richer and richer in ways that just don’t show up on a tax form," said Sen. Elizabeth Warren at a recent Senate hearing. It's time to change that.
Sep 15, 2024
The first televised U.S. presidential debate came way back in 1960. Few of us who happened to watch that debate remember much about it. But a look back at the transcript of that debate — a session that concentrated on domestic issues — shows that the evening’s proceedings mentioned not a single word about a stunning domestic transformation then about midway through its third decade.
That transformation? The United States had become a significantly more economically equal nation. With federal tax rates running as high as 91 percent on top-bracket income and unions representing more than a third of America’s private-sector workers — over five times today’s private-sector union share — the United States had given birth to the world’s first mass middle class.
In just a single generation, America had gone from a nation where the richest 1 percent held nearly half the nation’s wealth to a nation where that top 1 percent held only just over a fifth of that wealth.
This stunning reality came up nowhere in that first debate between the Democratic Party candidate John Kennedy, then a U.S. senator, and Richard Nixon, the nation’s Republican vice president.
But what if that debate had explicitly recognized that reality? What if that debate’s panel of journalists had asked the candidates whether they would encourage or discourage, strengthen or trim, the tax and labor policies that had created a much more equal United States?
If those journalists had asked questions along that line, would John Kennedy, once president, have dared to ask Congress, as he did in 1963, to drop the top-bracket tax rate on America’s richest down to 65 percent?
That Kennedy-era Congress would end up lowering the nation’s top tax rate, from 91 to 70 percent. A bit over two decades later, in Ronald Reagan’s second term in the White House, that top rate would sink all the way down to 28 percent.
The current top rate? On income over $731,201, married couples filing jointly face a 37 percent tax rate. Taxpayers making 100 times that $731,201, over $73 million, face that same 37 percent top rate. And on “capital gains,” the profits from the sale of stocks and other assets, these rich pay taxes at no more than a 20 percent rate.
At last week’s first — and probable last — debate between Kamala Harris and Donald Trump, the two candidates faced no questions on how little in taxes our contemporary tax code expects rich people to pay. Few noticed. But last week, at a Senate hearing on Capitol Hill, Finance Committee chair Ron Wyden from Oregon did his best to inject how much in taxes rich people don’t pay into America’s most high-profile political deliberations.
The bargain-basement tax rates on high incomes now in place, Senator Wyden made vividly clear, only hint at the tax windfalls our super rich are now regularly realizing.
Our billionaires, Wyden noted as he opened the hearing, can essentially “avoid paying taxes forever” through a neat trick tax justice advocates have come to label “buy-borrow-die.”
Our ultra-wealthy, Wyden went on to explain, are using their wealth to acquire valuable assets, then watching those assets appreciate and borrowing against the higher value of those assets to generate the cash they need to maintain their luxurious lifestyles. Eventually, of course, these deep pockets die, but any tax owed on their investment gains simply “disappears into the ledgers of history.” Their heirs face no tax whatsoever on the gains their benefactors have left them.
“This kind of tax trickery isn’t available to nurses and firefighters and tradesmen. Their taxes come straight out of every paycheck,” Wyden pointed out. “The ultra-wealthy get their own special set of rules.”
Long-time tax attorney Bob Lord, the current senior advisor on tax policy for the Patriotic Millionaires network and an Institute for Policy Studies associate fellow, expanded on “buy-borrow-die” and assorted other lucrative tax dodges in his testimony today before Wyden’s panel. Those dodges could — and should — take center stage in 2025, he agreed, as America’s lawmakers debate whether to extend the 2017 Trump tax cuts for the rich set to expire by next year’s end.
Republican lawmakers on the Senate Finance Committee spent a huge chunk of their time at today’s hearing depicting America’s rich as noble souls doing their best to create jobs in the face of a tax system that harasses them at every turn. Senator Elizabeth Warren from Massachusetts disputed that depiction.
“The wealthiest of the wealthy have figured out how to get richer and richer and richer and richer in ways that just don’t show up on a tax form,” Warren noted. “The result: The top one-tenth of 1 percent pays about 3.2 percent of their wealth in taxes every year while the bottom 99 percent pays more than double that.”
The Biden-Harris administration, the Massachusetts senator added, has advanced a proposal that would subject Americans with net worths over $100 million — the nation’s wealthiest 10,000 people — to a minimum 25 percent tax on their income, well below our federal tax code’s current 37 percent top rate.
But these wealthy, Warren continued, are claiming that they don’t have the money to pay that tax because their wealth is sitting “all locked up in stocks.”
“Are these 10,000 mega-millionaires actually cash-poor?” Warren asked Robert Lord, the veteran tax attorney witness. “Are they living like monks?”
“I haven’t seen,” Lord smiled in reply, “many monks on yachts.”
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