Here’s a letter to the Wall Street Journal:
A key issue in the pending case of Moore v. U.S. is whether or not the 16th amendment authorizes Congress to tax unrealized economic gains (“The Wealth Tax You May Already Owe,” Dec. 7). The amendment itself clearly authorizes taxation only of “income.” So the question before the court is this: Are unrealized economic gains income? Solicitor General Elizabeth Prelogar says they are. She told the Supreme Court that the “ordinary conception of income” is any “economic gain between two points in time.”
But she’s mistaken. Long before the 16th amendment was ratified people well understood that income is only what is realized from successfully deploying labor, land, or capital. John Stuart Mill, for example, wrote about “When … a capitalist invests £20,000 in his business, and draws from it an income of (suppose) £2,000 a year.”* Income is what is drawn from an asset; it’s not simply an increase in the asset’s value.
And although the Justices aren’t concerned with the economic consequences of taxing unrealized capital gains, citizens should be – and so ought to heed the full measure of what Mill wrote: “the common impression is [that the capitalist is the] beneficial owner both of the £20,000 and of the £2,000, while the laborers own nothing but their wages. The truth, however, is that he only obtains the £2,000 on condition of applying no part of the £20,000 to his own use. He has the legal control over it, and might squander it if he chose, but if he did he would not have the £2,000 a year also. For all personal purposes they have the capital and he has but the profits, which it only yields to him on condition that the capital itself is employed in satisfying not his own wants, but those of laborers.”
If government taxes unrealized gains, owners of productively deployed capital will liquidate more of their capital to obtain the sums necessary to pay these taxes; they will be led to squander their capital for the benefit of the government. America’s capital stock will shrink, thus reducing worker productivity and, hence, wages. The prospect is ugly.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
* John Stuart Mill, Socialism (published posthumously in 1879), pp. 83-84.