A few months ago, investigative outlet ProPublica managed to get some mileage out of making up a new (and almost entirely meaningless) tax metric. That was one thing for a left-wing advocacy organization, but for the Council of Economic Advisors (CEA) to jump on board is another thing entirely.
ProPublica’s report, based on leaked tax records of wealthy taxpayers, aimed to “prove” that the wealthy do not pay their “fair share.” As NTUF has shown in the past, the wealthy actually pay a disproportionately high percentage of income taxes — with the top 1 percent paying 40 percent of all income taxes, despite earning about 21 percent of adjusted gross income.
ProPublica found a handy way around these inconvenient figures: what if you simply count growth in on-paper wealth (that the tax code intentionally does not tax) as “untaxed income?” Shockingly, ProPublica found that, when you massively inflate the denominator, taxpayers’ tax rate goes way down!
This made-up measure, the “true tax rate,” counted taxes paid not only at income, but also growth in unrealized wealth. Unrealized wealth gains are purposefully untaxed for many reasons, not least because of the administrative nightmare taxing them entails.
Unfortunately, the nonsensical nature of this metric was not enough to keep the CEA from sullying itself by associating itself with it. Calling it a “relatively comprehensive measure” of the income of the wealthy, the CEA recently published a report analyzing the income tax rates of the wealthy including unrealized “income” from unsold stock.
The CEA’s analysis involves just as much of an apples-to-apples comparison as ProPublica’s. Unsold stock is not taxable, so the tax rate on any unrealized stock gains will always be zero. It’s not particularly interesting that the wealthy’s “tax rate” becomes a lot lower when you count things that aren’t taxable.
Of course, it’s possible that won’t be the case for long. Senator Ron Wyden (D-OR) has long pushed for an annual tax on unrealized capital gains, proposing to implement a system known as mark-to-market. President Biden recently expressed support for such an idea, and recent reports indicate it may be under consideration in the Senate.
Doing so would be a mistake. Not only would this require a massive investment in the Internal Revenue Service just to enforce and administer (on top of those already being proposed), but it would require implementing a tax on gains that exist only on paper. That means figuring out a way to deal with taxpayers’ for whom taxes on paper gains exceed their available liquidity, as well as new allowances for capital losses (ironically, a common source of ire among progressives).
The CEA is doing tax analysis a disservice by getting on board with this misleading and ultimately unhelpful statistic. That institution should demand better from itself than passing off cherry-picked data as analysis.