Kamala Harris’ campaign has proposed significant tax increases, most of which are in line with the Biden administration’s budget proposal released in March. The proposed tax on unrealized capital gains on the ultra-wealthy has attracted the most attention, with critics pointing out a variety of flaws: It wouldn’t be a reliable source of revenue, it would further penalize saving, and it would face implementation and constitutional challenges. But the real problem with Harris’ tax agenda isn’t any new rules she might introduce, but how she’ll deal with the coming changes to existing tax policy.

First, new taxes: The budget proposal includes a 25 percent minimum income tax for the wealthiest 0.01 percent of taxpayers, which is based on a new definition of income that includes unrealized capital gains. Taxpayers with $100 million or more would pay a 25 percent minimum tax not only on income generated from wages, business income, or the sale of securities, but also on any appreciation in stocks and other assets they don’t sell. If you own a stock and it doubles in value in a year, you don’t have to pay tax on that appreciation unless you sell the stock. Under the unrealized capital gains proposal, if you’re an ultra-high-net-worth individual, you’ll be taxed on that appreciation whether you sell it or not.

In addition to the new tax on unrealized capital gains, the administration’s fiscal 2025 budget also proposes taxing realized long-term capital gains at the same rate as earned income for taxpayers earning more than $1 million. By raising the top ordinary tax bracket to 39.6 percent, matching the top bracket for long-term capital gains to the top ordinary tax bracket at 5 percent, Biden’s budget would set the top combined tax rate for long-term capital gains at 44.6 percent. This proposal would make the United States an international outlier. Denmark has the highest capital gains tax of any major European country, at 42 percent.

Now, Harris’ campaign recently moderated that proposal, opting instead to raise the tax rate on long-term capital gains from 20 percent to 28 percent and raise the tax on net investment income to 5 percent. The result is a cumulative federal capital gains tax of 33 percent. While that’s not the highest in the developed world, it would still be well above international norms, given that the average tax rate on long-term capital gains in the OECD is about 20 percent. What’s more, that 33 percent doesn’t even include state-level capital gains taxes, which in California are a whopping 13.3 percent.

One problem with both ideas is the volatility of income. Capital gains, whether realized or unrealized, fluctuate dramatically from year to year. Taxing unrealized gains adds a new element: imposing such taxes would also suggest that asset owners should receive deductions for unrealized gains. losses. In the current context where we tax realized capital gains, earnings fall sharply in recessions when asset values ​​fall. In the case of a tax on unrealized gains, the government may have to pay tax refunds in bad years.

The economic problems with Harris’ capital gains tax proposals are related to the increased tax burden on entrepreneurship. In the case of taxes on unrealized capital gains, the tax could be more burdensome for venture capitalists, angel investors, and other private businesses than taxes on realized gains. It is worth noting that some tax studies suggest that a tax on unrealized capital gains would be a more efficient solution. exchange for other taxes focused on capital, such as the realized capital gains tax or the corporate income tax. But barring a complete U-turn, Harris has not advocated eliminating the corporate income tax. In her 2020 campaign, she proposed raising the corporate tax rate to 35 percent, and so far in 2024, her campaign has stuck to Biden’s budget, which proposes raising the corporate tax rate to 28 percent. Even that smaller tax increase would give the United States the second-highest corporate tax rate in the OECD after including state corporate taxes.

Finally, the unrealized gains tax poses implementation challenges. First, it introduces a new definition of income into the tax code. The IRS has struggled to implement the Inflation Reduction Act’s corporate alternative minimum tax (CAMT), which imposes a minimum tax on the new definition of corporate income. The tax is based on the book income that corporations report on their financial statements and is not an economically reasonable basis for taxation. The tax includes numerous adjustments to address (some) of the problems with the taxation of book income, but all of these adjustments introduce additional complexity for both taxpayers and the IRS. Another problem (common to estate taxes such as the estate tax) is that taxing unrealized gains on illiquid assets, particularly those of private companies, would force some taxpayers to liquidate those assets in order to pay the tax liability.

To be fair, the drafters of the proposal clearly thought about these common pitfalls and tried to come up with creative workarounds. Taxpayers could defer tax on unrealized gains on illiquid assets, such as private businesses (think a large family office or partial ownership of a large startup). But they would face an additional deferral fee when the assets are eventually sold. Formulas would be used to try to value illiquid assets: Instead of being revalued annually, the IRS would assume they increase by the rate on a five-year Treasury bond plus 2 percentage points until the taxpayer revalues. Initially, taxpayers could spread their first annual minimum tax liability over nine years. They could spread any minimum tax liability in subsequent years over five years to prevent liquidity problems. But each creative rule introduces new complexities, new tax planning opportunities, and potential disputes with the IRS.

This tax may also have constitutional grounds, but that is a completely different story.

While her capital gains tax proposals are economically damaging and administratively challenging, they may not be the worst of the policies under consideration. That honor goes to raising the corporate tax rate to 28 percent, especially given recent evidence of lower corporate tax rates and other pro-investment changes under the Tax Cuts and Jobs Act (TCJA) that are driving new capital investment in the United States. But the real issue with Harris’ support for Biden’s tax policies, and where she should be getting more questions, is how she will approach the expiration of the TCJA next year.

Major tax cuts for individuals and businesses are scheduled to expire late next year. They include, but are not limited to, lower personal income tax rates, a higher standard tax-free allowance, a larger child tax credit, and a 20 percent pass-through deduction for business income. The TCJA wasn’t just a tax cut: It included structural reforms, such as higher alternative minimum tax limits and tighter limits on the deductibility of state and local taxes (SALT) and mortgage interest (combined with a higher standard tax-free allowance) that simplified the code for millions of taxpayers. The limits on SALT and mortgage interest deductions also broadened the tax base, partially (but not fully) offsetting the significant tax cuts. These structural changes will also expire.

Neither Biden’s budget nor Harris’ campaign has a specific plan for which provisions it will extend and which it will let expire. Instead, Biden’s budget will simply extend all benefits of the 2017 tax cuts for households earning less than $400,000. How much will that cost? Well, the budget doesn’t include estimates. That’s understandable, given that it doesn’t specify which policies to extend, and tax modeling is usually easier when you have a proposal to model.

The Committee for a Responsible Federal Budget has provided a rough range of $1.55 trillion to $2.45 trillion for the cost of extending the TCJA cuts for taxpayers making less than $400,000. But rather than providing an estimate of that size, Biden’s budget does not include any line item for the cost of the extensions. Still, Biden’s budget promises that any tax cut extensions would be fully paid for with “additional reforms to ensure that wealthy people and large corporations pay their fair share.”

“Additional reforms.” Namely, tax increases targeted at high-income individuals and businesses, beyond the $5 trillion in tax increases already included in the budget.

Here is a non-exhaustive list of tax increases for high-income earners and businesses included in the budget: the capital gains tax hikes already discussed, raising the corporate tax rate to 28 percent, quadrupling the excise tax on stock repurchases, taxing unrealized capital gains at death, raising the net investment income tax, broadening the tax base on net investment income, taxing interest on earnings as ordinary income, raising the rate of the already complicated CAMT tax to 21 percent, a slew of taxes targeting international profits, and several tax penalties for oil and gas investments.

So, in addition to the revenue that will be used to raise other spending proposals in the budget, they clearly have a few more tax increases in store. I am far from referring to West WingBut do Biden and Harris have a secret plan to pay for the middle-class TCJA extensions? I’m kind of kidding, but only kind of. Most taxpayers will see a significant tax increase in 2026 without individual extensions. That’s a big deal that’s likely to eat up a lot of Congress’s time next year. It’s not too much to ask a presidential candidate for more details on what he wants to do about it. Instead of spending time designing Rube Goldberg taxes on unrealized profits, Harris should focus on what she wants to do with the sunsets.

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