Americans Oppose Taxing Unrealized Gains by an Overwhelming 3-to-1 Margin

Submitted by IMorales on Sunday, October 24th, 2021, 4,53 PM

Democrats are gearing up to impose a tax on unrealized capital gains. This "mark to market" regime would force Americans to pay taxes every year on the paper gain in value of assets -- stocks, collectibles, tchotchkes, etc. But Americans oppose taxing unrealized gains, by a ratio of 3-1.

Across all demographic groups, Americans strongly oppose taxing unrealized gains, according to a survey experiment with 5,000 respondents published in May 2021.

The paperThe Psychology of Taxing Capital Income: Evidence from a Survey Experiment on the Realization Rule, is authored by Professor Zachary D. Liscow of Yale University Law School and Edward G. Fox of the University of Michigan Law School. 

The researchers found:

"Respondents strongly prefer to wait to tax gains on publicly-traded stocks until sale versus taxing unsold gains each year: 75% to 25%. Though this opposition is strongest among those who are wealthier or own stocks, all demographic groups oppose taxing unsold gains by large marginsThis opposition persists and is often strengthened when looking across a variety of other assets and policy framings."

The realization rule requires that property must be sold before gains are taxed. By a margin of 75 to 25, people preferred this rule.  

The study also noted popular revolts against the property tax as evidence of the aversion to taxing unsold gains.

They asked participants about how a property tax should handle appreciated assets, noting that:

“In this context, respondents are again hesitant to fully tax gains on assets that have not been sold.”   

Survey-takers’ massive rejection of abandoning the realization rule held up even after they heard arguments in favor of this kind of taxation, when they themselves don’t own stock, and even if they’re Democrats.

A primary reason for this is because people use “mental accounting” heuristics, under which they react differently to unsold gains than other ways of getting richer, like wages:

"... These behaviors are often thought to result from people using heuristics that put stocks in different “mental accounts” than money in the bank or wages. Using these heuristics, most people treat stock investments as an “open” mental account until sale and do not fully internalize paper gains or losses."

After all, taxes paid on these assets would have to come from other sources of income, not the asset itself. 

The study explains this sentiment further:

"There is significant concern that unsold gains are not yet real in a sense. As shown in Table 4, the word most distinctively associated with opponents is “actual”—as in, taxpayers have not “actually” received income “yet.” Likewise, they note that the stock has not yet yielded “cash,” or anything in the taxpayer’s “hand.”"

Abandoning the realization rule is so unpopular that, even when told that this hypothetical tax would only impact those with over $10 million in wealth, the preference for taxing unsold stock gains only moderately increased by 9 percentage points to 34 percent.  

Many on the left including the progressive group ProPublica are suggesting that unrealized gains should be taxed annually.

Senate Finance Committee Chair Ron Wyden (D-Ore.) has long tried to impose a tax on unrealized gains, an initiative he calls, “Treat Wealth like Wages.”

But as shown by the study, taxing unrealized gains cuts deeply against Americans’ sense of fairness and common sense.

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