Congressional Democrats seem to have convinced themselves that the opponents of their efforts to engineer wholesale revisions to the American social contract can be mollified by feats of rhetorical cleverness.

They did their best to convince the nation that a smorgasbord of decades-old progressive aspirations constituted infrastructure—an effort that failed when they reluctantly carved out of that legislative initiative everything that objectively constituted infrastructure. Following that, Democrats tried to persuade the public that the package they spent weeks promoting on the basis of its $3.5 trillion price tag actually cost nothing at all. This tactic also met a deservedly ignominious end. And yet, the governing party is still possessed of an unflappable faith in its own mental dexterity. So, Democrats embarked on yet another daunting crusade to talk voters into the notion that the United States should now tax income that has not yet and, in fact, may never be earned.

In their ongoing struggle to write a reconciliation bill jam-packed with social reforms (which Democrats hope to send to the president’s desk in less than a week), the party is now toying with the idea of a tax on the “unrealized gains” enjoyed by wealthy investors. That is to say, money that exists only on paper. The plan—to the extent that there is a plan—is to tax the liquid assets of people with more than $1 billion in assets based on the capital gains they would have paid if they had cashed out on their investments, including stocks and even real estate. House Speaker Nancy Pelosi hasn’t been shy about calling this proposal a “wealth tax.” Meanwhile, Treasury Sec. Janet Yellen insists that this is not a “wealth tax,” per se, but merely a tax on the speculative investments of the very wealthy. The rhetorical brilliance is already blinding.

The problem that Democrats will encounter (assuming they even deign to mount a public-relations campaign around this proposal) is that they’re going to have to do a lot more of the talking than their opponents if they’re going to sell voters on this idea.

Democrats are first going to have to argue the why. It’s a reasonable assumption that anyone with even a tenuous grasp of human nature will intuit that a tax on an investment’s potential return will have a depressive effect on investment generally. That’s a steep societal price to pay for what the New York Times estimates is a provision that will target just 700 taxpayers and net a measly $200 billion in revenue over a decade. That’s a drop in the bucket of what Democrats hope to spend in this reconciliation package.

In the process, Congress will have opened the pathway to taxing unrealized gains on just about anything. Today, it’s the potential market value of assets owned only by people with nine-figure incomes. Tomorrow, it’s the 20 percent equity you have in your primary residence. Democrats will have to articulate a limiting principle here. And, in doing so, they will only cement the fear in voters’ minds that this revision to the social compact will be subject to mission creep.

If such a provision did become law, Democrats would eventually have to argue the constitutionality of all this. Many observers have criticized wealth-tax proposals like those advanced by Sen. Elizabeth Warren because they likely violate the prohibition on “direct” taxes in Article I, Section 9. It’s not at all clear how such a tax would satisfy the constraints imposed on income taxes in the 16th Amendment, which the courts have upheld insofar as the transfer of wealth is being taxed (a la the inheritance tax). Not the assets themselves, and only because they are there for the taking. Finally, Democrats will probably be made to explain how their proposal won’t simply force the super-wealthy to park their assets abroad, which was what led most of Europe to scrap their market-distorting wealth taxes. At least Warren had the foresight to include an “exit” tax on the Americans she knew would bolt for the exits.

Democrats are likely counting on class envy to do most of their work for them, but that still involves persuasion. And that’s the problem. Democrats have been doing a lot of talking about subjects that do not speak to the issues that resonate outside the Democratic base, and it’s costing them in the polls. Pollsters Joel Benenson and Neil Newhouse recently learned that the voters Democrats will need if they are to preserve their majorities are more concerned with inflation and its effects on the economy than “raising taxes on the rich.” Worse, from the Democratic perspective, those voters are beginning to link the government’s fiscal profligacy with their own worsening financial situations. As these pollsters found, a full 71 percent of self-identified independent voters agreed with the statement, “People will continue to pay more money on everyday expenses unless the government becomes more fiscally responsible.”

Democrats have put Republicans in the envious position of being able to obstruct Democratic initiatives without offering their own positive alternatives, because that’s what the voters they’re trying to attract want from them. By contrast, Democrats are trying to move mountains for their base voters, all while unconvincingly assuring everyone else that these aren’t mountains at all. That sounds like an impossible task—and it has so far proved to be just that. But Democrats can keep trying. Republicans sure won’t stop them.

tax code reform
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