Uncover the Shocking Truth: Trillions of Dollars Slip Through Tax Loopholes for the Wealthy

In a recent hearing of the Senate Finance Committee, the Joint Committee on Taxation (JCT) stirred controversy by reporting that the effective tax rate for the nation’s highest-income taxpayers stood at 34 percent in 2019. This number sparked a heated debate, with Chairman Ron Wyden criticizing the estimate as misleading, while Ranking Member Crapo praised it as accurate. The real issue at hand, however, transcends mere numbers and percentages, delving into the murky world of unrealized capital gains that favor the wealthiest Americans. Instead of fixating on tax rates, Congress should consider a more comprehensive solution: taxing these unrealized gains upon death at a higher rate than during an individual’s lifetime.

1. Clarifying the Numbers:
   • Estimates by reputable organizations like TPC, Treasury, CBO, and JCT place the effective individual income tax rate for high-income households at approximately 25 percent in 2021.
   • While the top marginal tax rate for these households hovers around 37 percent, this rate only applies to income exceeding certain thresholds. The actual average tax rate is a combination of various marginal rates.
2. The “Funny Math” Controversy:
   • JCT’s reported 34 percent tax rate appears at odds with the 25 percent effective rate for the same year, with discrepancies arising from attributing certain Federal taxes to individuals.
   • Conversely, the Biden Administration’s purported 8 percent tax rate includes unrealized capital gains as income, distorting the overall tax picture.
3. Unrealized Capital Gains:
   • Accounting for unrealized capital gains, which encompass substantial wealth in the hands of the ultra-rich, could vastly alter the perceived tax burden.
   • The debate around taxing these gains raises questions about defining economic income and justifying taxation on assets not yet liquidated.
4. Proposed Solutions:
   • While Wyden advocates for annual realization of unrealized gains, Biden proposes taxing assets over $100 million at death. Both approaches present logistical and legal challenges.
   • Taxing unrealized gains upon an individual’s passing aligns with established estate tax procedures, streamlining the process and potentially increasing tax revenue.

In conclusion, addressing the issue of unrealized gains offers a pragmatic solution to the ongoing tax debate among policymakers. By focusing on taxing assets at death, the government can effectively capture revenue that currently escapes the tax system. Instead of getting bogged down in arguments over tax rates, policymakers should prioritize closing the loophole that allows trillions of dollars in unrealized gains to evade taxation indefinitely.