Introduce Mark-to-Market Taxation of Capital Gains

Under the current tax system, investors are generally not required to pay taxes on capital gains until they sell their assets. The ability to defer taxes on capital gains reduces the effective tax rate on gains and creates a lock-in effect as investors can minimize their tax liability by holding their assets for longer periods.

This option implements mark-to-market taxation of capital gains for taxpayers with over $1 billion in assets or $100 million in income for three consecutive years, subjecting capital gains of high-income taxpayers to taxation on an annual basis. Mark-to-market would remove investors’ choice about when to pay taxes on gains, thus eliminating the lock-in effect created by the ability to defer taxes, but would lead to new problems, including administrative complexity, especially for illiquid assets, and reduced incentives to save.

On a conventional basis, this option would decrease the primary deficit by $628.3 billion over the budget window. Long-run GDP would be unchanged, while long-run GNP would fall by 0.1 percent. Incorporating changes in interest costs, the debt-to-GDP ratio would reach 172.6 percent by 2056.

The tax increase would be concentrated among taxpayers in the top 0.01 percent, who would see a decrease in after-tax income of 8.3 percent in the first year of the policy, stabilizing to a 2.2 percent decline in the long run.