Why Kamala Harris’ approach to capital gains tax is causing so much controversy
A major criticism of Kamala Harris in the business community since she became the Democratic nominee has been her endorsement of the Biden administration’s plans to overhaul the taxation of the wealth of the richest Americans.
But these plans – which include taxing unrealized capital gains on unsold holdings – would face tough opposition on Capitol Hill even if Harris won outright. Many of the critics are also greatly exaggerating how far-reaching they would be.
But that hasn’t stopped many wealthy individuals – especially Trump-friendly ones – from portraying these plans as part of a broader attack by Harris on wealthy people and the business community.
“This road leads to bread lines and ugly shoes,” Tesla CEO Elon Musk posted on X, formerly Twitter, about Harris’ economic agenda.
This reaction was triggered in part by the Harris-Walz campaign’s support of the tax increase proposals in President Biden’s latest budget proposal. These revenues, Harris’ aides said, would fund their “opportunity economy” programs, which include a child tax credit, housing subsidies and other measures.
Read more: Kamala Harris proposes tax breaks for first-time home buyers. What about Trump?
Two of Biden’s tax plans, now under Harris’ umbrella, focus on capital gains and would actually raise tax rates and also subject some “unrealized” gains to taxation.
However, they would apply only to America’s richest households (even many of the literal 1 percent would be unaffected) and would have a more limited impact on certain types of wealth.
The Biden White House has tried to portray the idea as an attempt to impose a minimum tax rate on the top 0.3% of all households.
The end goal, according to a Biden White House summary, is for these massively wealthy households to pay the same “marginal tax rate on their income that a highly paid worker pays on his or her wages.”
A focus on “unrealized” capital gains
By far the most controversial idea is the plan to tax households’ unrealized capital gains if their net worth exceeds $100 million. Unrealized gains are wealth increases that exist on paper but are tied to an asset that has not yet been sold.
This echoes calls by politicians such as Senators Bernie Sanders and Elizabeth Warren for a “wealth tax,” although the impact would be less pronounced.
Read more: Trump vs. Harris: 4 ways the next president could affect your bank accounts
Currently, capital gains are not taxed until assets are sold, regardless of income level. But this plan would impose a new minimum tax on a small portion of the wealthiest Americans, equal to 25 percent of their “income” — alongside a broader definition of income that includes some unrealized gains.
Many Democrats believe that Americans, who have huge reserves, are already able to borrow against those funds and generate income, and should therefore be taxed accordingly.
In addition, there are provisions that could mitigate the impact even further by allowing taxpayers to stretch payments and defer certain costs – albeit for a “deferment fee” – for hard-to-liquidate assets such as start-up companies or real estate.
In response, former President Trump attempted to announce that any restrictions on these plans would be quickly lifted.
A recent visit to a Las Vegas restaurant prompted the Republican candidate to make the baseless claim that the tax on unrealized gains “will soon be applied to small business owners and they will be forced to sell their restaurants immediately.”
Trump added that the idea goes “beyond socialism.”
Varied Reviews how capital gains would change overall
The entire capital gains system would also change if Harris succeeds in pushing through a second point of the Biden plan.
This part, in turn, calls for a higher capital gains tax rate for the richest Americans than is currently the case.
Long-term capital gains are currently taxed at 20% for the wealthiest Americans. This plan would raise that rate – at least for households earning over $1 million a year – to bring it in line with the overall rate for wealthy taxpayers.
The current top tax rate on wages is 37 percent, but both Biden and Harris want to raise that rate to 39.6 percent.
“Preferential tax rates on long-term capital gains and qualified dividends disproportionately benefit high-income taxpayers,” a White House document said in justifying the change.
Economists have also long criticized the plans – especially those related to unrealized assets – as unworkable, insufficient to solve the multi-trillion dollar annual federal deficit and likely to lead to distortions.
The Washington-based Tax Foundation estimated that Biden’s plan would “impose a complicated tax on a narrow segment of high-income households in a way that has never been tried before.”
Biden’s aides counter that a universal income tax rate could actually reduce distortions and remove the incentive for individuals to view their compensation as capital gains rather than wages.
Why it’s unlikely it will ever happen – even if Kamala Harris wins
These two capital gains tax plans could raise more than $800 billion over the next decade, but even if Harris wins the election and decides to prioritize them, they are likely to face an uphill battle in Washington.
After all, these are plans that President Joe Biden himself has been pushing for years. But he was unable to push them through, not even in 2021 and 2022, when Democrats controlled both the House and Senate.
Many of these proposals “have been repeated year after year because the Democratic Congress failed to pass them,” Brian Gardner, Stifel’s chief Washington policy strategist, wrote in a recent letter to his clients.
“This raises the question of whether things will be different in 2025,” he added.
If she wins, Harris could face an even more inhospitable political climate than Biden faced when he took office, as Democrats face a tough battle for control of the Senate.
“How much spending, tax cuts or tax proposals you can offer is limited by the makeup of Congress,” Jeannette Lowe of Strategas Securities said in a recent appearance on Yahoo Finance.
“There may be some restrictions.”
Ben Werschkul is Washington correspondent for Yahoo Finance.
Click here for political news on economic and monetary policy that will affect tomorrow’s stock prices
Read the latest financial and business news from Yahoo Finance
