In a recent interview with Jake Tapper on CNN’s “State of the Union,” Treasury Secretary Janet Yellen was asked how the Biden Administration plans to finance President Joe Biden’s proposed “Build Back Better” agenda items. The following is part of her response: 

“I think what’s under consideration is a proposal that Senator [Ron] Wyden and the Senate Finance Committee have been looking at that would impose a tax on unrealized capital gains on liquid assets held by extremely wealthy individuals, billionaires. I wouldn’t call that a ‘wealth tax’ but it would help get at capital gains, which are an extraordinarily large part of the incomes of the wealthiest individuals and right now escape taxation until they’re realized…so it’s not a ‘wealth tax’ but a tax on unrealized capital gains of exceptionally wealthy individuals.”

This is a pile of hot garbage. Yellen is not an ignorant person, and she should know better than to say something so ridiculous. First of all, capital gains do not “escape taxation until they’re realized” any more than appreciation of one’s real estate “escapes taxation” until the property is sold. If you are not realizing the gains — if you are not actually receiving an increase in money — then you are not taxed on it. This is a fundamental tenet of tax law and investment at all levels and for all income groups. The principle is not rendered void merely because the wealthiest individuals see more capital gains than the middle and lower classes.

The push for taxing unrealized capital gains has its roots in the same ideology that clamors for a wealth tax. This ideology was on full display last summer when ProPublica published a piece that invented a so-called “true tax rate” to rail against the fact that some of the nation’s wealthiest individuals see an increase in total wealth that is larger than their income. In the piece, the authors overlooked the fact that Warren Buffett paid $23.7 million in federal income taxes on his reported $125 million income over the period of 2014-2018. In other words, Buffett paid just shy of one-fifth of his income to the federal government over a four year period. However, this reality was cast aside in favor of the fact that Buffett’s wealth increased by $24.3 billion over that span, making his “true tax rate” (again, a made up statistic) only 0.1%. It would appear that both the authors of the ProPublica piece and Secretary Yellen need to re-enroll in an introductory level equities class. Or better yet, they just need to be a human being who pays taxes in America for more than five minutes. 

If the shares Buffett owns decrease in value, he does not lose any money unless he sells them. By the same token, if they double in value, he does not make any money unless he sells them. For ProPublica to suggest that Buffett is avoiding taxation because he only pays taxes on his income and not on the appreciation of all his assets is the height of economic illiteracy. Who else has a “true tax rate” less than their income tax rate? Almost everyone who owns real estate. According to Housing Tides, the real estate appreciation rate in the late spring of 2021 was roughly 2% month over month. Should the middle class family paying a mortgage on a 1,500 square foot house be forced to pay annual taxes on the appreciation of their real estate value? Never mind the fact that they have not sold their house or actually made any money from the appreciation. According to Secretary Yellen, their property is “escaping taxation,” and we cannot have that. We need to pay for Biden’s agenda. How dare you allow reality to discourage such a bold and ambitious idea?

Suggesting that a bad idea would apply only to the ultra-wealthy might make it easier to garner support for, but it does not make the idea a good one. Similarly, using linguistic tricks like the phrase “escaping taxation” over and over on live television does not make it true. If, instead of focusing on billionaires’ investments, people thought about what taxing unrealized gains would mean in their own lives, they would object to the idea wholeheartedly. To argue that the capital gains tax rate should be increased or that it should mirror the income tax rates is one thing, but to suggest that unrealized capital gains should be taxed is to argue in favor of taxing money that people do not have. Only a government employee like Yellen can say something so absurd and still be considered an “expert.”