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Taxing Wealth (Not Income): A Radical Proposal Elevating the Importance of Appraisal

Published: October 2, 2024


“Tax The Rich! Make the Rich Pay Their Fair Share!” These are the rallying cries of

many political activists in the US.


The problem for these activists is, the way the US tax system is set up, it’s very difficult

to tax the rich directly. Americans are generally taxed not according to how rich they

are: They are taxed according to how much income they report annually. These two

metrics – wealth and annual income – aren’t perfectly correlated. It’s possible to have a

lot of assets but no income and vice versa.


Given that the base metric in this US system is reported income, if you don’t want to pay

taxes, the trick is to reduce your reported income. Sometimes, this reduction is achieved

illegally, like when a corner store only accepts cash and underreports how much it

earns. Sometimes, however, it is done entirely legally, like when assets appreciate in

value but are not sold. The appreciation in unsold assets creates what is called an

unrealized gain. Wealth has increased, but the gain will not be realized or reported until

the asset is sold.


Unrealized gains can occur naturally, like when someone owns the house they live in for

twenty years and the property appreciates in value. Sometimes, however, unrealized

gains can be a deliberate tax strategy that many view as a loophole. Some very wealthy

people like Jeff Bezos and Elon Musk own a lot of stock in their businesses and see

their assets appreciate greatly without paying taxes on them. If Bezos or Musk need

cash, they don’t sell their stock: That would create a gain. Instead, they borrow against

their stock. This borrowing doesn’t count as income, and the stock gains remain

technically unrealized (though Bezos and Musk of course realize the cash they receive

from the bank). Kamala Harris has a proposal to end this tax avoidance strategy.


While she has subsequently walked back some elements of them, Kamala Harris’s

campaign endorsed President Biden’s proposed 2025 tax increases which include

taxing unrealized gains at 25%. So, if Jeff Bezos’s 1 billion shares of Amazon increase

in value during the year by a total of $650 million, his tax bill will increase by $162.5

million – sale or no sale.


As proposed, this tax will only impact taxpayers with net assets in excess of $100

million. However, other taxes were initially implemented to only target a minority of the

population and eventually broadened in impact. For example, the Alternative Minimum

Tax (AMT) grew from impacting 155 taxpayers in 1969 to 5.2 million taxpayers in 2017.

The federal income tax impacted only the top 3% of earners when it was implemented

in 1913. Today, if you’re reading this article, you’re probably paying federal income tax.


But let’s further evaluate this $100 million proposed threshold: How do you know if you

have net assets in excess of $100 million? Herein lies a privacy concern and our first

valuation problem. The government doesn’t receive balance sheets from individuals

recording all their assets. This is going to require collecting a lot of private and sensitive

data. Taxpayers with $100 million will also have a lot of illiquid assets. They might own a

couple buildings, their own business, some venture capital investments, etc. Unlike

Amazon or Tesla stock, there are not readily-available publicly-traded prices for these

illiquid assets. That means there’s going to need to be valuations of these: Appraisers

are going to be in high demand.


The net asset threshold is problem number one. Problem number two is figuring out the

unrealized gains in each year. Again, figuring out the year-over-year change in the value

of Amazon or Tesla stock is pretty straightforward. But what about non-tradable assets?


Harris’s proposal states that non-tradable assets would be assumed to increase at the

five-year Treasury rate plus two percentage points (currently 6%). However, the IRS

may offer avenues for taxpayers to appeal valuations, such as through appraisal. So,

any year these affected taxpayers think any of their assets have increased by less than

6%, they must obtain appraisals to prove it. Again, if this passes, we’re going to need a

lot more appraisers!


While this proposed rule may close one loophole, it is also going to create its own

loopholes. Here are a couple that immediately come to mind:


  • (1) Avoid ending up in the $100 million category: Any time an individual

approaches this category, they may place their assets in an irrevocable trust or

some other vehicle so that they avoid this proposed treatment.

  • (2) Take advantage of swings in the capital markets: Any student of the stock

market will be familiar with large crashes followed by speedy recoveries. For

example, the market ended 2022 down 20%. But by 2020 it was up 25%. Would

the taxpayer only need to obtain a 2019 report showing that the value decreased

20% this year and then fall back on the statutory increase of 6% (instead of 25%)

for 2020 and beyond? That would avoid realizing the gain for several years and

fail to achieve the stated goal of the policy.


The idea to tax income was once radical – government principally earned revenue via

tariffs. Today, the federal income tax has become a widely-accepted political reality. It

may be that taxing assets follows a similar trajectory of acceptance. Before we

implement this massive change, however, we should first think through the

consequences of doing so. One of the consequences would clearly be the increased

importance of appraisal. At least I’ll have an easier time at cocktail parties explaining

what I do for a living.


Eric Sundheim, ASA Principal Mercovus Valuations

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