With California’s wealth-tax debate heating up, it appears Congress does not want to be outdone. New York Democratic Representative Dan Goldman has introduced a new tax aimed at appreciated property held by high-net-worth individuals. The legislation offers yet another chance to highlight why tax proposals targeting capital all suffer from the same fatal flaws.
Goldman’s Redistribution of Billions by Instituting New High-Income Obligations on Overlooked Debt (ROBINHOOD) Act would impose a 20-percent excise tax on loans secured by appreciated assets. When a taxpayer borrows against the value of stock, real estate, or a business interest that has risen in value, the IRS would treat the loan as a taxable event.
The bill targets the so-called “buy, borrow, die” strategy, but it extends far beyond the wealthy, applying to individuals making as little as $400,000 a year. So while the bill’s press release makes breathless references to Elon Musk, Jeff Bezos, and Warren Buffett, the real targets are the millions of Main Street businesses that routinely use loans backed by the family’s assets to finance growth, purchase equipment, cover operating expenses, and hire new employees.
In other words, the bill would tax the ability of entrepreneurs to access the economic value of an appreciated asset. It turns appreciation into a de facto tax base, just as a wealth tax would. If your business grows in value, the growth alone triggers a tax the moment you use it to obtain financing. The tax is triggered by appreciation, and it is unavoidable unless the owner refrains from using the business’s appreciated value altogether.
For Main Street businesses, these debates are far from abstract. Their “wealth” is typically locked inside the companies they have spent decades building. Imposing a tax that springs to life solely because an asset has appreciated would force business owners to sell stakes in their own companies simply to satisfy the IRS.
We’ve already seen the real-world consequences of these policies abroad. When Norway enacted its wealth tax, founders and investors left the country, taking jobs, capital, and future revenue with them. The policy eroded the tax base and harmed workers far more than it affected high-net-worth individuals, who have the resources to move elsewhere. A U.S. version of this policy would produce the same outcome, only on a much larger scale.
Representative Goldman’s proposal is the latest iteration of a concept that has been tried, tested, and failed, many times over. As states like California and members of Congress revive these ideas, the lesson remains the same: proposals that tax capital – whether in the form of wealth taxes or a tax on unrealized gains – inevitably miss their target and end up taxing Main Street instead.