One-Time Ten-Percent Capital Gains Tax Could Unlock Revenue, Growth
It’d help with housing, too
President Trump says he wants to balance the federal budget, which now runs an annual deficit of roughly $2 trillion a year on revenues of roughly $5 trillion a year. Department of Government Efficiency spending cuts will help make the math work. So will revenues from increased tariffs on China, Canada, and Mexico, and hoped-for economic growth generated by less regulation (today came a welcome announcement from Treasury suspending enforcement of the Corporate Transparency Act), more energy production, and lower corporate tax rates.
The pattern has been that, for better or worse, these big federal budget deals typically also include some “one-shot” provisions that help to “pay for” other tax and spending adjustments —Trump has promised to end taxes on tips, on overtime, and on Social Security benefits, and to make auto loan payments tax deductible—over the term of the legislation.
How can Trump, his Treasury secretary, and the Congressional leadership make all these numbers add up?
One outside-the-box idea that is worth considering is a one-time opportunity to sell assets at a lower-than-usual capital gains rate.
So many company founders, corporate executives, and baby boomers are sitting on vast sums of stock market wealth with little or no tax basis. Until the stock is sold, it generates no taxable income (other than dividends, which are a different story). Plenty of people are hanging on to the stock until they die, figuring their heirs will eventually benefit from the step-up in basis that is built into the current tax code.
The left—Senators Sanders and Warren with their wealth tax plans, and President Biden and Senator Wyden of Oregon with their Biden-Wyden wealth tax—see “unrealized” capital gains as a deep pocket to be hit with mandatory and perpetual taxation. They are correct that there is a lot of money there. A better alternative to their plans would be a voluntary, one-time taxation approach. That would allow those who want to pay the capital gains tax to choose to do so—at a rate set temporarily at a level that makes the transaction a win for both the government and the taxpayer.
The top federal long-term capital gains rate is 20 percent. All but a few states (havens such as Texas, Florida, Wyoming and New Hampshire) also subject long-term capital gains to state income tax—as high as 13.3 percent in California and 10.9 percent in New York.
A ten percent federal rate would be low enough to lure sellers with a bargain and high enough still to collect plenty of revenue for the government. The Bloomberg Billionaires index alone—Elon Musk’s Tesla stock, Mark Zuckerberg’s Meta stock, Jeff Bezos’s Amazon stock, the Google guys, etc—could generate a lot of capital gains taxes. They needn’t exit their entire stakes, but they might want to sell at least enough to pay the taxes.
Some details would matter here. At the risk of adding some complexity, once a gain was realized and declared and the tax paid, it’d make sense to impose a five year moratorium on claiming a loss on any sales at the new basis. Otherwise the deal would just be a little too generous.
It all would be pro-growth because it would unfreeze assets that are now locked up, making it more frictionless to redeploy the capital to other and potentially more productive new uses.
For a concrete example of how this might apply at non-billionaire scale, imagine how it might work on residential housing. Plenty of empty-nester baby boomers are still rattling around in large empty houses they bought for a relative song in the early 1970s. A temporary capital gains tax break might encourage them, finally, to sell to a young family in search of a new home. The young family moves out of their apartment into a house, and the empty-nester baby boomers move somewhere that’s a better fit for them. The government captures some capital gains tax revenue that otherwise would have been lost or postponed. The housing supply is more efficiently allocated instead of being distorted by tax considerations that freeze people in place. (There’s a $250,000/$500,000 exemption on capital gains on sale of a primary residence, but $250,000 isn’t much of an exemption in places like California, the Washington D.C. metropolitan area, or New York.)
Tax policy purists may be tempted to reject such a scheme as short-term gimmickry. I’ve been pushing for 20 years (“A Capital Idea,” an April 19, 2005 editorial from the New York Sun) for a more platonic option of eliminating the death tax together with also eliminating the step-up in basis at death, an idea now also backed by Apollo’s Mark Rowan. It hasn’t yet happened. While we wait for that reform to be implemented—which could take a while—a temporary ten percent capital gains rate could pull in a lot of revenue and unlock a lot of frozen capital. Democrats should like it because it will tax a lot of those “unrealized capital gains” that they see. Republicans should like it because it is voluntary and a significant reduction relative to the 20 percent rate.
If the big worry is that it might generate too much of a one-time windfall, then perhaps some of the proceeds might be directed to paying off some of the existing U.S. debt, or to shoring up the long-term finances of Medicare and Social Security. Finding $2 trillion a year to close the budget gap will take some creativity. This is one idea worth discussing.
Remembering Dore Gold: For the New York Sun I wrote a remembrance of Dore Gold, the former Israeli ambassador at the United Nations. The headline is “Dore Gold, a Visionary Israeli Diplomat Ahead of His Time, Is Dead at 71.”
The piece begins with my first encounter with Gold, in the summer of 1993, when I was in Israel on an Anti-Defamation League-sponsored trip for college newspaper editors.
When, between 1997 and 1999, Gold was Israel’s ambassador to the United Nations, I was managing editor of the Forward. At least one Sunday morning, I visited Gold at his ambassadorial apartment just off Fifth Avenue with a notebook and a tape recorder to capture for the readers of the Forward the points he wanted to convey. He did that, with impressive clarity and directness, while we both took occasional sips from cups and saucers that were part of a set of china decorated with Israel’s state emblem, a menorah surrounded by olive branches.
I last saw him during a visit to Israel in 2017, when I met him in his office in Jerusalem at Beit Milken.
Gold was a product of a New England prep school (Northfield Mount Hermon) and an Ivy League university (Columbia) who did pretty well for the Jewish people and for civilization.
His ideas about the importance to Israel of defensible borders, particularly the need to maintain control of the Jordan Valley, remain highly relevant today. They will almost certainly outlive Gold himself, as they did Yigal Allon, and they may well serve as a basis for whatever President Trump and Netanyahu are cooking up in terms of Israeli sovereignty for parts of the West Bank.