Then there are proposals for a “mark to market” tax, which would tax unrealized capital gains — the appreciation in the paper value of assets such as stocks — every year, not just when an asset is sold. Ron Wyden, a Democratic senator from Oregon, has proposed a billionaire income tax along these lines. Such a tax would raise a lot of money for the Treasury. But it faces its own constitutional hurdles. The Supreme Court has left the legal status of unrealized-gains taxes deliberately unresolved, and a mark-to-market tax’s chances at the court would be, at best, 50-50. Despite the proposal’s many appeals, building a generation of fiscal policy on a coin flip would be risky.
Another idea is imposing a borrowing tax, a policy aimed directly at the widely criticized “buy, borrow, die” loophole. The loophole allows the rich to take loans against their portfolios and use the money to finance glamorous lives. They pay no capital gains tax because they avoid selling the assets — often stock that has risen in value — that they use as collateral for the borrowing that sustains their lifestyles. When they die, they pass on their assets to their heirs, who, because of the “stepped-up basis” loophole in inheritance law, can avoid paying capital gains taxes even if they sell those assets. A borrowing tax would discourage the buy, borrow, die strategy and restore some fairness to the tax code. It’s a policy I like — I proposed my own version of it.
Except the wealthy are not using the buy, borrow, die loophole all that much. In work with Edward Fox of the University of Michigan, I looked at two decades of data measuring how much the rich actually borrow. The top 1 percent borrow an amount equal to roughly 2 percent of their economic income each year — defined broadly to include the gains on stocks they haven’t sold. Their unrealized gains over the same period were about 20 times that amount. At current tax rates, imposing a borrowing tax would raise about $50 billion over 10 years — a paltry number relative to the size of the federal budget. It’s just not where the money is.
Congress has a simpler, tried-and-true tax policy to choose from: raising the rates.
Current taxes already reach most of the rich’s economic income, which includes unrealized capital gains. The existing income tax captures about 60 percent of the top 1 percent’s economic income and roughly 71 percent after adjusting for inflation. Even for the top 0.1 percent, about 60 percent is taxed, adjusted for inflation.
Measured this way, the ultrarich mostly aren’t escaping the tax system through exotic loopholes. They mostly increase their fortunes with and spend regular taxable income — salaries, dividends, interest, business profits, realized capital gains — and they earn a lot of it.
