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Tipsheet

Dems Reportedly Give Up Dream of 'Insane' Tax on Ultra Wealthy

AP Photo/J. Scott Applewhite

Democrats appear to have thrown in the towel on their plan to tax unrealized capital gains.

The tax, which was blasted as total "insanity," was expected to hit earners with $1 billion in assets or $100 million in income for three consecutive years, The Wall Street Journal reported in October. 

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At the time, Treasury Secretary Janet Yellen said the plan “would help get at capital gains, which are an extraordinarily large part of the incomes of the wealthiest individuals, and right now escape taxation, until they’re realized, and often they’re unrealized in the death benefit from a so-called step up of basis.”

The Heritage Foundation said the proposal was likely "an unconstitutional wealth tax," which, if passed, could force Treasury "to spend trillions of dollars without an adequate source of funding."

Article I, Sections 8 and 9 of the Constitution deny Congress the power to levy a direct tax unless it’s “apportioned among the several states” in proportion to population. That means that the tax must be spread evenly among every person in every state.

In Pollock v. Farmers’ Loan & Trust (1895), the Supreme Court held that a tax is direct if it’s “upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided.”

More recently, in NFIB v. Sebelius (2012), the court reaffirmed that taxes on personal property are direct taxes.

A tax on unrealized capital gains would be a direct tax because it’s a tax on personal property paid by someone who cannot—quoting the Pollock decision—“shift the burden upon some one [sic] else.” As a direct tax, Democrats’ proposed tax must be spread equally among the populations of the states to pass constitutional muster, but it isn’t. (The Heritage Foundation)

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According to CNBC, Democrats are now exploring other options but that doesn't mean the proposal won't end up in future legislative negotiations over Build Back Better.

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