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The Biden Administration’s Cynical and Unconstitutional Proposed Tax on Wealth

A tax on phantom income is likely a harbinger of increasingly destructive proposals yet to come.

By Dr. Mark W. Hendrickson

President Joe Biden’s proposed 2023 federal budget, which calls for a gargantuan outlay of $5.8 trillion, includes plans for a new kind of tax on the wealth of the rich. The official party line of Team Biden is that such a tax will be “fair” and “efficient.” That is some of the most cynical political spin I ever have encountered. The proposed wealth tax would be anything but fair and efficient.

Collectively, our country has made great progress in reducing discrimination against individuals due to race, gender, sexual preference, etc. The glaring exception is that progressives insist on discriminating against “the rich.”

They rationalize this kind of discrimination by saying that it is based not on who a person is, but what a person has. They say it is “unfair” that some people accumulate so much wealth. But when one considers how the typical billionaire amassed his fortune — in service to others, supplying them with the goods and services that they value — then really the progressives are saying it is “unfair” for some individuals to provide so much more for their fellow man. Bizarre, isn’t it?

They are also saying that people who have earned large fortunes, but have not spent those fortunes on various luxuries and self-indulgences, deserve to be subjected to special additional taxes. But by maintaining their wealth in the form of capital as part of the vast capital pool that undergirds our prodigious productive capacities, rich people are benefiting the rest of us. To target wealthy savers with discriminatory taxes as if they were lowly miscreants rather than society’s economic benefactors is perverse.

The proponents of a wealth tax think it is “unfair” that many wealthy people decide not to sell their investments and so avoid paying a tax on the resulting capital gains. The tax-raising clique objects to any behavior that deprives the government of revenue, as if the citizen has an obligation to manage his affairs to maximize his tax bill.

Another argument in favor of a wealth tax is that without it, other taxes have to be higher. Not necessarily. That is only true if Uncle Sam continues to overspend. Get spending under control and there won’t be a need for additional taxes, fair or unfair.

The assertion that a wealth tax would be “efficient” is belied by the description of the complicated formula for calculating the actual liability. Since the tax would be on unrealized gains — that is, on investments such as stocks that an individual owns, and has not yet sold — then there aren’t any actual gains, but only hypothetical “paper gains.” The problem is, nobody knows what the market price of stock holdings — and hence, the consequent capital gains or losses — will be until some future date when the transaction takes place.

You can see the potential for an administrative nightmare here: What if the value of the investments has fallen between the time it was taxed and when it was later sold, leaving the investor with an actual loss after having paid a tax on a phantom gain? Will Uncle Sam refund the tax already collected on the now-evaporated paper gain? Nope. As currently structured, the Biden proposal offers to collect the wealth tax on paper gains over a five-year period. That way, if the price of the investments falls and erases the paper gains, the investor can stop paying — but he can’t get a refund from the government for taxes already collected on the phantom gain. What is fair about government taxing an investor’s loss?

Apart from the fact that a wealth tax would be neither fair nor efficient is the inconvenient fact that such a tax would be unconstitutional. There is no provision in the Constitution of the United States for the federal government to tax wealth. Since day one, Uncle Sam has been authorized to tax consumption through excise and import taxes. With the adoption of the Sixteenth Amendment to the Constitution in 1913, the federal taxing authority expanded to include taxes on annual income. “Income,” of course, represents an actual monetary gain, not a hypothetical paper gain. Taxing wealth that has been accumulated over the years has always been exempt from taxation (with the exception of inheritance taxes, a Marxian scheme that mutilates justice).

Another point to consider: Be very wary when you hear promises that only the very rich would pay the proposed paper wealth tax. Remember what happened a century ago: Popular support for the Sixteenth Amendment, which authorized Uncle Sam to tax income, was won with promises that only the rich would pay the new tax. At the outset, that was true. The tax rate was only one percent on incomes of $3,000 (equivalent to about $85,000 today), two percent on incomes over $20,000 ($567,000 today), and a top rate of seven percent on incomes over $500,000 (multi-millions today). Alas, within a mere four years, the top rate soared to 77 percent, and the lowest income Americans were taxed six percent of their income — just one percentage point below what the rich were taxed four years earlier.

As the federal government continues to increase its already outlandish, unaffordable spending, it will become increasingly desperate for additional sources of revenue. The unfair, inefficient, unconstitutional proposal for a tax on phantom income is likely a harbinger of increasingly destructive proposals yet to come.

Dr. Mark W. Hendrickson is a retired adjunct faculty member, economist, and fellow for economic and social policy with the Institute for Faith and Freedom at Grove City College.

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