Kamala Harris’s tax proposals: Unpacking the potential impact on American taxpayers

Vice President Kamala Harris has endorsed a series of tax proposals included in President Biden’s 2025 budget, aiming to raise over $5 trillion in revenue over the next decade.

These plans include a range of tax increases targeted at wealthy individuals and corporations, most notably a new tax on unrealized capital gains.

While the spotlight has been on this controversial measure, Harris’s proposals encompass a broader array of tax changes that could significantly impact the US economy.

Key highlights of Harris’s tax plan

Harris’s tax proposals feature more than 90 tax increases and other changes, making it one of the largest tax overhauls in over four decades.

Key elements of the plan include:

• Tax on unrealized gains: A new 25% minimum tax on income and unrealized capital gains for households with more than $100 million in wealth. This tax would apply even if the gains have not been realized through a sale.
• Higher corporate tax rate: An increase in the federal corporate tax rate to 28%, which, when combined with state taxes, would result in the highest total corporate tax rate in the developed world.
• Increased top individual income tax rates: Raising the top federal income tax rates, resulting in combined state, local, and federal tax rates that exceed the revenue-maximizing threshold in many states.

Taxing unrealized capital gains

One of the most debated aspects of Harris’s plan is the proposal to tax unrealized capital gains – a measure that targets the wealth of high-net-worth individuals.

Unrealized gains are the increase in value of an asset that has not been sold, such as a rise in stock prices or property value.

Under the Harris proposal, households with more than $100 million in total wealth would face a minimum 25% tax on their combined income and unrealized gains each year.

Economic and administrative challenges

Taxing unrealized gains presents several challenges:

• Liquidity issues: Taxpayers might be required to pay taxes on assets they have not sold, potentially forcing them to liquidate assets or take loans to meet tax obligations.
• Administrative complexity: Accurately valuing assets like private companies, real estate, or collectibles each year could be administratively burdensome for taxpayers and the IRS.
• Economic distortion: Critics argue that taxing unrealized gains would discourage investment and savings, and could lead to volatile tax receipts depending on market conditions.

Higher taxes on corporations and the wealthy

Harris’s plan aims to increase the tax burden on wealthy individuals and corporations, reversing much of the tax relief provided by the Tax Cuts and Jobs Act of 2017.

Key changes include:

• Corporate tax increase: The proposal raises the corporate tax rate from 21% to 28%, aligning it with rates prior to the 2017 tax cuts. This increase is expected to generate significant revenue but may also reduce corporate investment and hiring.
• Higher capital gains and dividend taxes: The top capital gains tax rate would increase to 44.6%, making the US one of the highest tax jurisdictions for investment income.
• Stock buyback tax: An increase in the tax on corporate stock buybacks from 1% to 4%, aimed at discouraging companies from returning excess capital to shareholders instead of investing in growth.

Additional tax measures

Harris’s tax proposals include a wide range of other tax changes that target specific industries and high-income earners:

• Higher taxes on energy production: Increased taxes on oil, gas, and coal industries.
• Limits on retirement contributions: New restrictions on contributions and accelerated distribution requirements for high-income individuals.
• New excise taxes: Introduction of a 30% excise tax on electricity costs associated with digital mining operations.

Impact on economic growth and taxpayers

Economists warn that Harris’s tax increases could have far-reaching economic impacts:

• Lower wages and job opportunities: Higher corporate taxes could reduce business investment, leading to lower wages and fewer job opportunities for American workers.
• Potential for economic distortion: The proposed tax increases could push the combined federal, state, and local tax rates beyond the optimal point for revenue generation, leading to economic inefficiencies.
• Increased complexity and compliance costs: Many of the proposed changes, especially the tax on unrealized gains, would add significant complexity to the tax system, increasing compliance costs for businesses and individuals.

Harris’s focus on middle-class tax relief

While Harris’s proposals focus on raising taxes on the wealthy and corporations, she has also pledged to support middle-class Americans through targeted tax cuts:

• Middle-class tax cut: Harris envisions an “opportunity economy” anchored by a middle-class tax cut, which she claims will benefit over 100 million Americans.
• Expanded child tax credit: A proposal to increase the child tax credit to provide $6,000 per child for the first year of a baby’s life.
• No tax on tips: Harris supports a “no tax on tips” policy with a cap to prevent abuse, and advocates for an increase in the federal minimum wage.

The debate around wealth taxes

The idea of taxing unrealized gains, often referred to as a wealth tax, has been a contentious topic.

Proponents argue it addresses economic inequality by taxing the untaxed wealth of the ultra-rich, who often avoid taxes through strategies like borrowing against their assets instead of selling them.

Critics, however, caution that such taxes could be unconstitutional, difficult to implement, and economically damaging.

• Legal challenges: Opponents argue that taxing unrealized gains could violate constitutional protections against direct taxation without apportionment and raise issues related to property rights.
• Economic implications: Taxing unrealized gains could reduce the incentive to invest in high-risk ventures, potentially stifling innovation and economic growth.

Conclusion

Kamala Harris’s tax proposals represent a significant shift toward higher taxes on wealth and corporate income, aimed at reducing economic inequality and generating revenue for public investments.

However, the economic and administrative challenges of implementing these taxes – particularly the tax on unrealized gains – pose significant hurdles.

As the debate continues, the potential impacts on investment, economic growth, and the overall tax landscape remain uncertain.