Some ideas are like horror movie villains. They’re dangerous, and no matter how many times they’re defeated, they never seem to die.

The misguided idea of taxing unrealized capital gains is back on the scene. Sen. Ron Wyden, D-Ore., floated a proposal to tax unrealized capital gains in 2021.

It was widely debated in 2022, when Congress was considering a multitrillion-dollar tax and spending package.

Opposition from Sen. Joe Manchin, D-W.Va., to taxing income before it’s earned helped defeat the idea then.

But the idea was far from dead. President Joe Biden included a version of the tax in his latest budget.

Vice President Kamala Harris also has endorsed the idea.

The first step in killing a bad idea is to recognize it for the scourge it is.

A realized capital gain—which we currently tax—is the difference between the price you sold an asset for and the price you paid for it. An unrealized gain, on the other hand, is an estimate of what that difference would be if you had sold an asset that you still hold.

The difference between taxing realized capital gains and unrealized gains is the difference between the government taxing people on income they’ve actually received versus the government taxing them on income they might receive later.

It would give the government the first claim on income, taking a big slice before the supposed owner of the asset ever sees a penny.

In effect, it would turn property owners into property renters, with Uncle Sam as their landlord. //

If you bought a house for $300,000, and the value rose to $500,000 a couple years later, you could be stuck paying tax on the $200,000 of gain even as you’re struggling to make mortgage payments. At a 25% tax rate, it would cost you $50,000 in federal taxes.

It would be like having a second mortgage, but in some ways worse.

At least mortgage payments end after 30 years. But you would never finish paying off your unrealized capital gains tax payments, as long as you owned the asset and its value was increasing—even if that increase was only from inflation.

And unlike mortgages, which give homeowners clearly defined payment terms, unrealized capital gains tax payments would be unpredictable, rising or falling depending on the housing market, inflation, and subjective assessments of a house’s value. //

Those in Washington who propose taxing unrealized capital gains generally include broad exemptions for certain asset classes and based on income or asset thresholds. These exceptions would give investors a path to escape from the tax, which is better than the alternative. The tax would have fewer direct victims as a result.

But the tax-induced capital flows still would wreak economic havoc—and without managing to raise much government revenue. So, the new tax would do little to satiate lawmakers’ appetite for more tax dollars.

And once a horror movie villain—or a bad idea—gets a foot in the door, it quickly can swing the door open wide and claim more victims. When the income tax was first implemented in 1913, it applied to less than 1% of the population, and most of those who paid it paid only a 1% rate. That small initial income tax spawned something far worse and more widespread over time.

Allowing the government to tax income that doesn’t exist sets an even more dangerous precedent.