Willie Sutton was asked why he robbed banks and he replied “Because that’s where the money is.” We should keep this idea in mind with our tax system. Bill Gates does.
Mr. Gates recently pointed out that the super-wealthy do not pay income tax because most of their wealth does not come from income. They do not pay capital gains taxes because they don’t sell much of their stock. I will add that they don’t pay inheritance taxes because they can do as Mr. Gates has done and “donate” it to his foundation where he and his heirs control it. This is not fair. There is a large pool of money that is not being taxed. The wealthiest 0.01 percent of U.S. households own over 10 percent of the nation’s wealth and it is largely untaxed.
I propose we add a tax on unrealized capital gains. Our current capital gains rate is 20 percent, so specifically what I propose is a 20 percent tax on unrealized capital gains over $20 million or a 15 percent tax on unrealized capital gains, whichever is less, with the balance of the capital gains tax due when the gains are realized or ownership is transferred.
Let me illustrate my proposal with two examples:
1. You have unrealized capital gains of $100 billion. You owe $15 billion in taxes now and $5 billion more when the gains are realized.
2. You have unrealized capital gains of $25 million. You owe 20 percent of $5 million: $1 million now and $4 million more when the gains are realized.
A fundamental notion of a “fair” tax system is that all wealth is taxed exactly once. My proposal identifies a large pool of untaxed wealth, and taxes it once without adding a second tax to wealth already taxed. In other words, it echoes Willie Sutton’s observation without adopting his morally dubious sentiments.