On Housing Values & the 'Wealth Tax'

But a wealth tax requires taxpayers to pay a tax based on the estimated value of their assets now, even though that value is only on paper and unrealized.

By Tom Giovanetti

For most homeowners their home is their biggest investment. That’s why many homeowners are over the moon about the news that housing prices rose an astonishing 23.6 percent in May, year over year.

But they might not be quite as excited if that meant they would have to pay 23.6 percent higher taxes to the federal government this year. Because that’s how a wealth tax works.

An increase in a home’s estimated value only exists on paper. That increased value only benefits homeowners if and when they sell. And it might not benefit them at all, because we might be in a housing bubble so that home values fall in a few years.

But a wealth tax requires taxpayers to pay a tax based on the estimated value of their assets now, even though that value is only on paper and unrealized.

Housing prices are actually much more stable than other investment assets, such as stocks, bonds, commercial real estate and commodities. The value of such assets can rise and fall significantly over a short period of time, and can even become worthless.

Should we require people to pay taxes based on the estimated paper value of their assets, knowing that an asset might be worth less or nothing down the road?

There is also the problem of inflation. If your home value increased by 23.6 percent last year, but inflation is 10 percent, the real increase in value of your home was only 13.6 percent.

Can we trust proponents of a wealth tax to make sure it accounts for such inflation? Why would we?

Today capital gains taxes are not indexed to inflation, so when a taxpayer incurs the capital gains tax, at least part of the tax they are paying is on a false, ghost profit because of inflation. So if an investor sells an asset that has appreciated by 7 percent, but inflation is 8 percent, that investor actually lost money on the asset sale but still have to pay a capital gains tax on the supposed “gain.”

If capital gains taxes are not indexed to inflation today, why would we assume Congress would adjust a wealth tax to inflation?

Of course, proponents of the wealth tax promise that it would only apply to the wealthy. But if it’s not fair to tax someone on a false or paper valuation, that applies whether a taxpayer is middle class or wealthy.  Especially since the wealthy already pay more than their fair share of taxes.

Most of us pay an assortment of taxes — income taxes, sales taxes, property taxes. All tax systems have flaws, distortions and compliance problems.

But the problems of a wealth tax far exceed those of other taxes, and we would be wise to avoid it.

This TaxByte was written by IPI President Tom Giovanetti.