Personal Finance

Democrats float a tax on investments to help pay for $3.5 trillion budget plan

Key Points
  • Congressional Democrats are weighing a slew of new tax hikes to help cover their $3.5 trillion budget plan.
  • A couple of proposals from Senate Finance Committee Chairman Ron Wyden, D-Ore., call for so-called mark-to-market taxes on derivatives and carried interest, which may result in levies on gains every year.
  • However, with pushback from Republicans and centrist Democrats, it's unclear which measures will make the final budget.
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Watch for these possible tax hikes meant to raise Biden's $3.5 trillion

Congressional Democrats are floating a slew of taxes to help cover their $3.5 trillion budget plan, including new levies on the wealthy.  

Senate Finance Committee Chairman Ron Wyden, D-Ore., has introduced proposals for taxes on so-called derivatives, which are financial contracts linked to assets as well as carried interest, which generally is received by hedge-fund managers and private equity firms.

These measures call for a "mark-to-market" tax, meaning investors may pay levies annually based on market value, and may pave the way for a broader push for similar levies on capital gains, according to a Tax Foundation analysis.

Currently, investors don't pay taxes on gains or claim a deduction for losses until they sell. However, mark-to-market levies would occur every year, even if they still own the asset.

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"The country's wealthiest — who profited immensely during the pandemic — have not been paying their fair share," said Wyden in a statement provided by a spokesperson. "They can defer, defer, defer and then never pay tax on billions in gains." 

U.S. Senate Finance Committee Chairman Ron Wyden, D-Ore., questions IRS Commissioner Charles P. Rettig at a June 8, 2021 Senate Finance Committee hearing.
Tom Williams | Pool | Reuters

Future mark-to-market tax proposals may aim to stop billionaires from delaying taxes for decades or even indefinitely by passing wealth to their heirs, according to a list obtained by CNBC.

"No nurse or firefighter or teacher in America can play those games," said Wyden. "They pay their taxes with every paycheck and are rightfully outraged when they read about the wealthiest few paying so little while they are working hard to make ends meet."

"We need to fix this broken system," he said. 

Taxpayers with income of more than $500,000 received about 72% of all realized capital gains in 2016, according to IRS data.

A mark-to-market tax on billionaires may affect roughly 600 Americans and raise "hundreds of billions" in revenue, according to some estimates. 

However, it may be difficult to predict how much such a measure may bring in, said Leonard Burman, institute fellow at the Urban Institute and co-founder of the Tax Policy Center. 

"We don't have good data on the changes in the value of assets that people are holding," he said.

It really eliminates the main avenues that people can use to avoid capital gains tax.
Leonard Burman
co-founder of the Tax Policy Center

Moreover, income tax revenue for the government may be volatile without limits on annual loss deductions.

"There could be trillions of dollars in losses in a year," Burman said.

But the measure may still have a significant impact, depending on the limitations and phaseouts, he said.

"It really eliminates the main avenues that people can use to avoid capital gains tax," said Burman.

However, with pushback from centrist Democrats and Republicans, it's unclear which proposals may make it into the final version of the budget. 

Wyden proposed a mark-to-market plan in 2019 and delivered a white paper, calling for a levy on taxpayers making more than $1 million in income or with $10 million in assets.

Earlier this year, Democrats including Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt., proposed a 3% annual tax on wealth of more than $1 billion.