We’ll leave market commentary, and judgments about Mr. Zuckerberg’s expensive investments in virtual reality, to others. On matters of public policy, though, the episode should not be allowed to pass without noting its implications for how Americans think about taxing wealth. Specifically, it confirms the folly of plans, such as those offered by progressive Democrats, that would claim a certain percentage of ultra-rich households’ net worth each year. And, conversely, it confirms the wisdom of the existing system, which generally taxes the profits people make when they sell assets.
Last year, legislators led by Sen. Elizabeth Warren (D-Mass.) proposed a 2 percent annual levy on household net worth above $50 million — with an extra 1 percent on fortunes larger than $1 billion. This was premised on the notion that unrealized capital gains do not exist just on paper, but are actually a form of income, in part because wealthy individuals can borrow against them to finance their — sometimes lavish — lifestyles. The White House went so far as to publish an analysis last year claiming that the 400 richest families in the United States only pay 8.2 percent of their income in taxes — if you consider unrealized gains as income.
Mr. Zuckerberg’s predicament illustrates the fallacy of this sort of thinking. If an unrealized gain is income that should be taxed, then an unrealized loss should be deductible, which in his case would undoubtedly wipe out all his individual tax liability. Of course, even in a bad year such as this one, Mr. Zuckerberg or, say, more modestly rich people who hold Meta’s now-beaten-down stock, could be forced to sell to raise cash to pay the wealth tax. That, in turn, could feed a downward spiral, with negative repercussions for middle-class 401(k)s and pension funds.
The progressives are right, though, that there is a need for greater wealth equality, and that tax reforms could help achieve it. Capital gains should be taxed when they are realized — that is, when an asset is sold for more than it was bought for. But the top tax rate should be higher — 37 percent, just like ordinary income, instead of 23.8 percent, as under current law. Since higher income households are far more likely to report capital rather than wage income, this would eliminate a major source of inequality. It would also reduce the economically wasteful tax-avoidance strategies through which wealthy people convert ordinary income to capital gains. And unrealized gains should be taxable by those who inherit appreciated assets; current law shields such windfalls via the “stepped-up basis” loophole.
Legislative action on wealth taxation is admittedly unlikely, given Republicans’ opposition and Democrats’ failure to advance Ms. Warren’s proposal or anything similar in the current Congress. Still, in terms of understanding the issues, Mr. Zuckerberg’s loss could be the public’s gain.
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Read More: Opinion | Zuckerberg’s wealth dip amid Meta’s stock slip shows how to tax wealth