Below is my column in the Hill on President Joe Biden’s new tax on “unrealized gains.” After the President rolled out the new tax, his economic adviser Jared Bernstein went on Fox News and had a moment of uncontrollable honesty. He blurted out to Bret Baier that “it is very much a tax on wealth.” For the White House, it was a cringe-worthy moment. After going through considerable effort to cover this tax in sheep’s clothing, Bernstein ran out of the White House screaming “Wolf, Wolf.” Indeed, the new tax is being framed as a “pre-payment” to avoid the obvious: that it is an unconstitutional wealth tax. Bernstein’s statement is now likely to feature prominently in court filings challenging this tax if it ever secures congressional approval.
Here is the column:
Announcing his new taxation plan to raise an additional $1 trillion, President Biden repeated his oft-stated assurance that “I am a capitalist.” The concern raised by his new plan, however, is not one of capitalism but constitutionalism. While not addressed in the president’s remarks, the Biden White House is planning to introduce a new type of income tax that would fundamentally change the taxation powers in the United States. Taxing the “unrealized gains” of billionaires is likely to be popular, but it may also be unconstitutional.
It is difficult for average Americans to fret over the tax burdens of Jeff Bezos or the roughly 700 other billionaires who would be subject to this change — but this would be a new tax which, if successful against billionaires, is unlikely to stop with them.
Politicians have long turned to the “Eat the rich!” battle cry when things are not working out politically or economically. When struggling in the 2020 Democratic presidential primaries, Sen. Elizabeth Warren (D-Mass.) pledged a wealth tax, declaring that she was coming after “the diamonds, the yachts, and the Rembrandts too.” Then-New York City Mayor Bill DeBlasio, another Democratic contender at the time, was barely registering in the polls when he promised that “we will tax the hell out of the wealthy.”
Now, facing record lows in polls (including only 33 percent approving his handling of the economy), President Biden is picking up the same class-warfare cudgel. Indeed, in defense of this new tax, Sen. Bernie Sanders recently compared American billionaires to Russian oligarchs.
There is no question that taxing billionaires always makes for good politics, but it can also make for bad cases when an income tax is not based on actual income. Like today’s popular call to seize the yachts of Russian oligarchs, the gratification of taking from the “super rich” can be lost if you have to give it back.
The Biden tax would raise an estimated $360 billion in new revenue over the next decade. It would target households worth more than $100 million that do not already pay 20 percent tax to increase the tax burden to that level on their “full income.” However, what the Biden administration is calling “full income” would be subject to the additional tax.
Income tax focuses on actual income or gains acquired by citizens in any given year. That includes “capital gains” when you sell an asset for more than its original purchase price. It is “realized” when you sell it.
Democrats now are seeking “unrealized gains,” even though an asset has not been sold and could go down in value. It is a more sophisticated version of Warren’s wealth tax, but it is arguably just as unconstitutional.
The Constitution originally imposed a narrow limit on Congress’ taxing authority. Article I, Sections 8 and 9, barred any direct tax unless it’s “apportioned among the several states” in proportion to population. In other words, it must be spread evenly among every person in every state.
In 1895, Congress sought to impose an income tax, but was stopped by the Supreme Court in Pollock v. Farmers’ Loan & Trust (1895). The court barred any such tax “upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided.”
That case led to the ratification of the 16th Amendment, which allows Congress to levy “taxes on incomes” without apportionment. Yet it expressly states that “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Biden, however, is now asserting the right to tax not only income but assets. Rather than wait for a taxpayer to sell an asset and tax those gains, he wants to start collecting taxes now.
The Biden White House insists this is merely “a prepayment of tax obligations these households will owe when they later realize their gains. … This approach means that the very wealthiest Americans pay taxes as they go, just like everyone else, and eliminates the inefficient sheltering of income for decades or generations.” Framing the tax of assets as a pre-payment still leaves it a tax on current wealth rather than income.
There is also the daunting logistical task of valuation and why some assets may be counted over other assets.
The same is true about a home. A family house likely will grow in value, and that value can be captured as a property tax by states. Yet the federal government cannot also take that value as a “prepayment of tax obligations” on an asset that might go down in value or not be sold for decades.
The targeting of billionaires is a brilliant way to get the public to accept a new type of tax. Once allowed, though, it can then be used on any asset and against any tax bracket to tax “unrealized gains.” If history shows anything, it is that the government tends to operate like a gas in a closed space: Expand the space, and the gas will fill it evenly.
Taxing 700 fat-cats is not going to erase the towering debt of the government. That would require exploiting new, untapped sources of income. Unrealized gains would open up a massive amount of potential taxable assets. Moving from 700 billionaires to 22 million millionaires would be based on the rationale of rich people not paying their fair share. After all, many would be holding the very same stocks or shares or assets. With almost 60 percent of citizens paying no income tax, the need for such revenue is only likely to increase.
Democrats have argued for years for a wealth tax. The Biden proposal is as clever as it is cynical. The White House is betting that it picked the least popular group to target in order to get average citizens to accept a new type of tax; once accepted for billionaires, the question then becomes a matter of discretion, as Congress taps other brackets for revenue.
During the 2020 Democratic primary debate, Warren was applauded when she rubbed her hands together and gleefully explained how she would take some of the wealth of fellow candidate John Delaney. Delaney was worth $65 million, so he would arguably miss Biden’s cutoff. But Warren’s theatrics show how this is unlikely to stop with “The 700.” She treated Delaney’s wealth like it belonged to her and others, an irresistible windfall of public funds.
During the French Revolution’s “Reign of Terror,” Pierre Gaspard Chaumette, president of the Paris Commune, rallied the mob by quoting the French philosopher Rousseau that “when the people shall have nothing more to eat, they will eat the rich.” As shown in 1793, lawless measures rarely stop with those first targeted. No one is suggesting millionaires will be carted off in tumbrels to the guillotine. However, taxation can prove an insatiable appetite — when the feast on the rich begins, it is unlikely to end with a first course of billionaires.
Jonathan Turley is the Shapiro Professor of Public Interest Law at George Washington University. Follow him on Twitter @JonathanTurley.