If you were thinking it would be hard for Democrats to get any worse, along comes an idea like that of Senator Ron Wyden of Oregon, who thinks unrealized gains should be taxed. Wyden is no wide-eyed youngster, either. Not only is he 69 years old, but he’s the top-ranking member of the Senate’s tax committee. Here’s a description of his proposal:

Under current policy, capital gains, such as increases in value for held stocks, are only taxable when they are “realized.” In other words, if you own stock that increases in value from $1,000 to $1,500, you’re only liable to pay taxes on the $500 increase in value if you sell the stock at $1,500 and “realize” the $500 gain.

Wyden’s idea, on the other hand, would replace this simpler system with one in which capital gains would be taxed annually whether or not they were realized. In other words, if a stock you held increased in value from $1,000 to $1,500, you would still be liable for that $500 gain even if you didn’t sell and the value only changed on paper.

Wyden would counter that this is an oversimplification, and to an extent he would be right. Long-term capital gains, or capital gains on assets held for more than a year, enjoy a substantial zero percent bracket. Yet short-term capital gains, or capital gains on assets held for less than one year, are taxed as ordinary income. Without changes to this structure, Wyden would be imposing a tax on every new asset a taxpayer acquires that gains any value at all during that year.

In addition to all its other flaws, this would be difficult to carry out because the value of many assets would be hard to pinpoint until those assets are sold. And of course, values that rise can fall, and indeed they often do. So this amounts to a tax on the imaginary or at least potential value of assets. Hey, why not? It’s all in the service of making the rich poorer.

And Wyden is quick to assure us that this will only affect the rich, the really really really rich, not you and me, so what the hey?:

Sen. Ron Wyden, D-Oregon, announced on Tuesday that he is working on a mark-to-market system that would tax unrealized capital gains on assets owned by “millionaires and billionaires.”…

This levy, assessed annually, would kick in at the same rate as all other income, Wyden said. Currently, the top marginal rate on ordinary income is 37 percent.

In comparison, long-term capital gains are taxed at a top rate of 20 percent.

And capital gains are now taxed only when assets are sold and the gains are realized and not just on paper.

More:

“Everyone needs to pay their fair share and the best approach to achieving that goal is a mark-to-market system that would require the wealthy to pay taxes on their gains every year at the same rates all other income is taxed,” Wyden said in a statement.

Yeah, the wealthy aren’t paying their fair share, according to Wyden and the Democrats — even though the top 1% are actually paying 37.3% of all income taxes in the US. And by the way, unrealized gains are not income.

This particular idea may not be quite as dreadful as the Green New Deal, but it’s way up there (or down there). It’s another attempt to spread the wealth around, but this one is especially stupid/pernicious. Here’s the rationale behind it, ostensibly:

Wyden’s proposal would tax assets as soon as the price goes up, rather than when the asset is sold. The logic behind this is simple — paper gains represent real wealth, since you could sell the asset and get cash any time you want. Waiting until the asset is sold in order to tax it allows the wealth to compound untaxed, which causes wealth inequality to accumulate.

But paper gains represent potential wealth, wealth that is only made actual if and when the asset is sold. The thing itself has no stable value—the wealth it generates depends on what it actually does generate for the seller at the exact time it is sold. What’s more, an unrealized capital gains tax goes against what I understand to be the basis of our income tax laws, which is that they are a tax on income both earned (wages, etc.) and unearned (interest, dividends, etc.).

As far as I know, most taxes (both local and federal) except for property taxes (which are not federal) involve paying when there is some kind of actual transaction in the real world. That transaction can be a purchase or the profit from a sale, it can be a tariff on the import of goods, it can be the receipt of wages or interest or dividends, but the tax is paid either at the time of the transaction or at the end of the tax year in which the transaction occurred. To change that rule for income tax from realized gains to unrealized ones is a big big deal and an enormous and transformative change rather than a small one.

Oh, and about those millionaires and billionaires, the only ones it will supposedly affect? That’s the sort of thing that was said in order to get the 16th Amendment passed to have a federal income tax in the first place—that it would only apply to the very very rich. We all know how that turned out.

David L. Bahnsen calls Wyden’s proposal “extreme, silly, impractical, dangerous, and inane…inherently destabilizing, logistically farcical, and ethically unforgivable.” in National Review, and says that “we do not tax theoretical income.” Bahnsen adds this about Wyden’s proposal:

…[T]he compliance costs would be the biggest boondoggle our nation’s financial system has ever seen. How in the world is illiquid real estate that has not sold supposed to be “valued” each and every year, let alone illiquid businesses, private debt, venture capital, and the wide array of capital assets that make up our nation’s economy but do not fit in the cozy box of “mutual funds”? What kind of drain to the economy would such an annual exercise in “mark-to-fantasy” represent, as professionals driven by an objective of tax efficiency are tasked with valuing an asset out of thin air?

But let’s ignore that deal-breaker of a problem for a moment. Let’s just assume we are talking about Microsoft stock, which has an easily definable market value and infinite trading liquidity: What should we do each year when the stock price has gone down?…The cluster-you-know-what that would be created in allowing people to take losses year-by-year on investments that have not been sold probably has the most sophisticated and tax-savvy investors salivating at the opportunity to game this mess of an idea to their own favor.

Much more at the link. Much much more.

Ron Insana calls Wyden’s idea “beyond ‘breathtakingly terrible'”:

This is yet another full-employment act for accountants, tax attorneys and others who would then create a wide variety of tax avoidance schemes forged from whatever loopholes may arise from new legislation.

Further, unless one is a trader and not an investor (short term versus long term), this idea will add unnecessary volatility to the financial markets and cause pockets of weakness in them when it comes time to pay the piper each and every year…

The proceeds to pay taxes have to come from somewhere, and no investor will take out loans to pay taxes. They will sell stocks and bonds, thereby creating a season of tax harvesting that will depress prices as the bills come due.

Much more at that link, too.

Whether Wyden is serious about this or not, it is a very ominous development that he is talking about it at all, another sign of how far the Democrats have gone off the rails with proposals that would almost certainly be destructive to our entire economy.

[Neo is a writer with degrees in law and family therapy, who blogs at the new neo.]