After stumbling in their attempts to raise taxes for the wealthy in a conventional manner, Congressional Democrats are adopting unconventional measures.

The new proposal is to tax billionaires on their so-called unrealized gains – the growth in the value of assets, such as stocks and real estate, that have not yet been sold. To understand why lawmakers might turn to a group of more than 700 billionaires to subscribe to a massive spending program, consider this statistic: Since the start of the COVID-19 pandemic, billionaires have seen their wealth increase by 70%. , rising from nearly $ 3 trillion. to an almost incomprehensible $ 5,000 billion, according to Forbes data analyzed by Americans for Tax Fairness and the Institute for Policy Studies Program on Inequality and the Common Good.

Unsurprisingly, critics, the ultra-rich and even some Democrats have decried the idea as new, untested and dangerous. Other experts worry about whether it would be too difficult to assess the assets of billionaires or whether the proposal could pass the constitutional course. These attacks have already compromised the idea in Washington.

But the billionaire’s tax is not as new and untested as it seems. The main concepts already exist in the tax code. As it turns out, these provisions are currently serving the interests of the ultra-wealthy class, which has so far bypassed most taxes aimed at wealth rather than income.

The ultra-rich have a very different financial life than everyone else. They earn next to nothing in wages, or what the rest of us call income. Amazon’s Jeff Bezos typically cut a base salary of about $ 80,000 for the middle class. Others, like Facebook’s Mark Zuckerberg, Oracle’s Larry Ellison, and Google’s Larry Page, have at various times taken a $ 1 symbolic salary.

But many ultra-wealthy Americans have figured out how to finance a lavish lifestyle without having to pay income tax. Their wealth is almost entirely made up of assets such as stocks, such as Tesla stocks which make up the vast majority of Elon Musk’s shares. Over $ 270 billion in wealth. Our tax code levies a 23.8% capital gains tax for those with the highest income, but only when selling an asset. Their holdings can grow by billions of dollars a year, but the rich owe nothing as long as they hold onto their stocks. When they need money, they borrow it, like Ellison and Musk have made billions, pledging the value of the shares as collateral. He was called “Buy, borrow, die, and it’s a wonderful system for the super-rich.

This system allows them to enjoy luxury cars, yachts, homes on multiple continents, and occasional space travel while in some cases reporting a salary of one dollar a year or less to the IRS.

This is why the ultra-rich are able to pay negligible taxes, especially when compared to the growth of their wealth, as ProPublica reported earlier this year, as part of our series “The Secret Files of the World. ‘IRS’. In 2018, Musk paid $ 0 in federal income tax. (He declined to discuss his taxes with ProPublica.)

The current proposal would tax billionaires on those unrealized gains. If shares of Amazon, Facebook, or Berkshire Hathaway rose 20% in a year, Jeff Bezos, Mark Zuckerberg, or Warren Buffett, respectively, would have to pay taxes on that gain, even if they don’t sell a single share. . Assets that are more difficult to value, such as private companies or real estate, would also be subject to tax.

Part of the objection to the proposed billionaire’s tax is that it is a radical departure from the current tax system, which taxes people only when they make money.

It’s wrong. There are several provisions in the current tax code by which unrealized gains are taxed.

Here is an example of something in the code today. Some hedge fund managers may do what is called a 475 election, a maneuver named after article 475 of the tax code. Thanks to this provision, their entire fund is taxed at its market value at the end of the year. They have to pay income taxes whether or not they sell the underlying stock. Are these hedge fund managers crazy? Nope. They do this because it gives certain types of funds several advantages (especially those that make fast transactions every nanoseconds), including freeing them from obeying trading rules which they can find onerous.

Hedge fund managers are intimately familiar with the concept of valuing latent gains. Their remuneration depends on it. Each year they get a small percentage, usually 2%, of the assets they manage. If they are doing well and the fund goes up, they get a performance fee, often 20% of the increase in the fund’s value. How do they determine this 20%? They calculate unrealized gains. On December 31, they notify their clients that their assets have increased and are paid 20% of that amount. If those stocks drop on January 1, they don’t have to return the money.

The mirror image of unrealized capital gains also exists in the tax code. Today, companies that buy equipment get a deduction meant to approximate the amount that it loses in value each year. This concept is called depreciation. In other words, you get a deduction based on an estimate, not when you sell something. You could call it an unrealized loss.

And then there’s the wealth tax on unrealized gains that millions of Americans already pay: property taxes, for which every home or apartment owner is responsible. Property taxes are an estimate of the value of your home or land by a city or town, almost always in a year that you haven’t sold.

The current proposal is not a wealth tax, but it has a similar goal of raising money only from the ultra-rich. Its elegance is that it equates the gain of wealth with income. In theory, a wealth tax, which has its own complexities and constitutional issues, could be superimposed.

When people complain that the new billionaire tax is unconstitutional, they may be forgetting all these provisions that exist today that do similar things.

Another argument against such a tax is that it would be too difficult to enforce because it is difficult to value assets with precision. The stock markets reflect a clear value for public companies, but the value of private companies, real estate, works of art and other assets is more difficult to determine.

This was perhaps more true 40 years ago, but there are now entire industries dedicated to the valuation of private assets. Commercial real estate, for example, relies on the work of research and investment banking companies that analyze and value office buildings. And if banks are willing to lend to the ultra-rich against their assets, they are likely to be comfortable valuing them. If all of these entities can do it, so can the IRS.

It’s a measure of how much the political conversation about wealth inequality has changed that this new tax is even being taken seriously. While a tax on billionaires for their unrealized earnings isn’t as new as people want to claim, it would clearly be complex to implement. Perhaps, however, not as complex as involving all Democrats.