Kamala Harris's Tax Proposals and Potential Impact on the U.S. Economy

Author: Gabriel B. Ajak, MBA in Finance and Economics; Executive Education Fellow at Harvard Kennedy School.

As the U.S. presidential election rapidly approaches, it's important for voters to understand the candidates' tax plans, especially those procrastinating voters. Today, I will break down Vice President Kamala Harris's tax proposal. If you're interested in learning about Trump's tax plans, be sure to check my page in the next coming weeks. You ask, why wait for the Trump tax article? Because Donald Trump is a former president, and most Americans have already lived through the Trump presidency.

Since the Democratic Party forced President Biden to withdraw from the presidential election on July 21, 2024, following a disastrous debate against Donald J. Trump on June 27, 2024, Biden swiftly endorsed Vice President Kamala Harris to replace him on the Democratic ticket. This last-minute decision created an unusual political dynamic for American voters, as many were unsure of who Kamala Harris was and what her beliefs entailed. In a short period, Kamala Harris attracted national attention with her strong economic proposals, which included plans to tax unrealized capital gains. In this article, I will explore Kamala Harris's tax plan to help voters who are still deciding who to vote for in Tuesday's general elections. Let's dive in.

As Kamala Harris positions herself in the 2024 presidential race, her tax proposals—most notably a tax on unrealized capital gains—have generated significant debate. Harris's tax plan targets wealth accumulation among the ultra-rich while expanding benefits for middle-class and working Americans. Critics argue, however, that her approach, particularly the unrealized capital gains tax, could lead to economic consequences that may inadvertently impact middle-class Americans. This article provides a comprehensive examination of Harris's tax proposals, focusing on the unrealized capital gains tax and its potential implications for the broader economy.

Harris's Key Tax Proposals

Harris's tax plan includes a range of measures aimed at reshaping the U.S. tax system.

1. Billionaire Minimum Tax on Unrealized Gains: The proposal mandates a minimum 25% tax on unrealized capital gains for individuals with a net worth exceeding $100 million. This policy would target around 0.01% of taxpayers, essentially those in the highest wealth brackets, who would be required to pay taxes annually on asset value gains, even if those assets remain unsold.

2. Increased Corporate Tax Rates: Harris supports raising the corporate tax rate from 21% to 28%, aligning with previous Biden administration proposals. This move aims to generate revenue from large corporations, potentially raising substantial funds for federal programs.

3. Changes to Capital Gains and Dividends Taxation: Her plan also proposes increasing taxes on long-term capital gains and qualified dividends to 28% for individuals earning over $1 million, closing what is perceived as preferential tax treatment of investment income for high earners.

4. Expansion of Middle-Class Tax Credits: Harris has proposed making the expanded Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) permanent to support working families. Additionally, she advocates for first-time homebuyer credit and incentives for renewable energy investments.

5. Limiting Retirement Contributions for High-Income Individuals: A proposed cap on retirement account contributions for high-income taxpayers with large Individual Retirement Account (IRA) balances further aligns with her stance on reducing benefits for the wealthy.

The Unrealized Capital Gains Tax Implications

The centerpiece of Harris's tax strategy is the unrealized capital gains tax, a novel approach that would depart from traditional U.S. tax policy. Under the current tax system, capital gains are taxed only when assets are sold, meaning any appreciation in asset value goes untaxed until realized. Harris's plan would fundamentally alter this by taxing unrealized gains annually, effectively treating the increase in asset value as income, regardless of whether the asset is sold.

1. Implementation Challenges: A tax on unrealized gains would necessitate complex asset valuations annually. Critics argue that valuing non-tradable assets—such as privately held companies, real estate, and art—could prove challenging and require additional resources for compliance and enforcement by the IRS.

2. Economic Impact and Investment Behavior: Proponents of the tax argue it could help address wealth inequality by curbing wealth accumulation among the ultra-wealthy. However, critics caution that it may also deter long-term investment and discourage entrepreneurship, potentially leading to a reduction in capital stock, wages, and job creation. For instance, the Tax Foundation estimates that Harris's tax plan, including the unrealized gains tax, could reduce the U.S. GDP by approximately 2% and decrease employment by 786,000 jobs. 3. Example Case: Suppose a taxpayer with a $200 million net worth sees a $10 million increase in the value of a privately held asset. Under Harris's plan, this individual would owe additional taxes on the unrealized gain, potentially adding a $1.95 million tax liability. This amount would be credited against future capital gains taxes upon sale, but it still requires substantial upfront tax payments, affecting liquidity and investment decisions.

Harris Tax Plans and Potential Risks for the Middle Class

While Harris's tax proposal directly targets ultra-wealthy Americans, critics raise realistic concerns that its broader economic effects could trickle down to middle—and working-class Americans. Here are several risks associated with Harris's plans.

1. Impact on Investment and Savings: Critics from various economic schools argue that taxing unrealized gains could lead to lower investment rates across the economy. This would affect the returns on pension funds, retirement accounts, and other collective investment vehicles that depend on stable, long-term growth, indirectly reducing the returns available to middle-class savers.

2. Market Volatility: A tax on unrealized gains could add volatility to financial markets. Wealthy individuals subject to the tax might feel pressured to sell assets to cover tax liabilities, particularly in years of significant appreciation. This could lead to market sell-offs that could affect asset values market-wide. A volatile market can have repercussions on portfolios and retirement accounts for ordinary Americans, potentially impacting their financial security.

3. Administrative and Compliance Burdens: Managing a tax on unrealized capital gains would require substantial resources and sophisticated tracking mechanisms. Implementing new valuation methods and systems could place a strain on the IRS, increasing the risk of inefficiencies and errors. Additionally, some argue that such tax policy changes could lead to increased tax avoidance and loophole exploitation among high-net-worth individuals, undermining the tax's intended revenue generation.

Perspectives from Critics and Economists

Several experts and institutions have voiced concerns regarding Harris's unrealized capital gains tax proposal:

The Cato Institute: Adam Michel from the Cato Institute has described the tax as part of a broader $5 trillion "tax iceberg" that could have unforeseen economic repercussions. He argues that taxing unrealized gains could have cascading effects, dissuading investment and adding complexity to the tax system without effectively reducing wealth inequality.

Economic Policy Institute: While supportive of wealth taxes in theory, some economists argue that Harris's specific approach might not yield the anticipated economic benefits. They point out that wealth taxes in other countries have shown limited success in reducing inequality, often leading to capital flight and asset relocation among the wealthy.

Lawrence Zelenak, Duke University: Zelenak raises practical concerns about the compliance and logistical challenges associated with annual asset valuations. He suggests that the complexities of the unrealized gains tax might outweigh its potential benefits, especially when considering its untested nature in U.S. tax policy. The Harris campaign firmly contends that taxing unrealized capital gains is a powerful strategy for driving economic growth.

Unrealized gains, which represent potential profits from capital assets like stocks or real estate, only become actualized when these assets are sold at a price higher than their purchase price. Consider this example: if you bought 500 shares of Tesla stock in January 2020 for $60 per share, and by September 2020, the value surged to $2,500 per share, you would hold an unrealized gain of $2,440 per share. You can only realize this gain by selling the stock, effectively locking in a profit of $2,440 per share.

Under Harris's proposed tax on unrealized capital gains, however, you would be taxed on these profits you have not technically received yet. It is crucial to recognize that asset prices—whether stocks, precious metals, real estate, or bonds—are volatile; they can rise significantly but can just as quickly decline. Therefore, in a Harris presidency, you could be obligated to pay a 25% tax on unrealized capital gains, even on assets for which you have incurred losses. This underscores the potential financial burden of such a tax policy.

Harris's tax proposals and her unpopularity among voters have drawn a rollercoaster debate in all political discourses, from TikTok to national mainstream media to an average YouTuber. However, the Harris campaign doubled down on these tax proposals, claiming that they are good for working Americans, as they aim to balance economic inequality and create an opportunity economy.

Harris's tax proposals reflect an unrealistic approach to tackling wealth disparity in the U.S. The Democrats' operatives believe imposing a minimum tax rate on the ultra-wealthy will close loopholes, allowing significant wealth accumulation without corresponding tax liabilities. However, the economic and practical implications of the unrealized gains tax raise important questions about its feasibility and potential impact on the broader economy.

While it might generate additional revenue from the ultra-wealthy, the unrealized capital gains tax could be a double-edged sword. Its potential effects on market stability, investment behavior, and administrative complexity could introduce unintended consequences. For middle- and working-class Americans, the broader economic repercussions could indirectly impact savings, pensions, and job security. As the debate unfolds and continues to the election night and beyond, voters and policymakers must weigh these considerations carefully to ensure that any tax policy changes support a fairer economy without inadvertently disrupting financial stability and economic growth for all Americans.