>Income Taxes and Unrealized Capital Gains

• Sheffrin, Steven M., 2025, “Realization Makes an Intellectual Comeback,” SSRN Working Paper no. 5057313, February.
• Fox, Edward, and Zachary Liscow, 2025, “The Role of Unrealized Gains and Borrowing in the Taxation of the Rich,” SSRN Working Paper no. 5104644, February.

The New York Times’ disclosure of nearly two decades of President Trump’s tax returns in 2020 and the release of his returns by the House Ways and Means Committee in 2022 led to much discussion of his low income tax payments: $750 in 2016; $750 in 2017; and $0 in 2020.

How were such low payments possible? Discussion focused on the taxation of unrealized capital gains as well as the tax strategy colloquially described as “buy, borrow, die.”

The US income tax system taxes the increased value of assets (stocks, bonds, private businesses, and real estate) only when those gains are realized—that is, when the assets are sold. But someone who has assets can borrow against their value by pledging them as collateral. The loan is not income. The borrower must pay interest on it, but he can keep rolling over the principal so the loan never need be repaid in his lifetime. Upon the death of the borrower, obligations are paid off and the value of the remaining assets to those who inherit them is “stepped-up” to market value at the time of inheritance. Thus, the capital gain from the change in value under the initial owner is only taxed through the estate tax. Hence the phrase “buy, borrow, die.”

Sheffrin’s article succinctly explains the intellectual debate about the taxation of capital gains over the years. Traditional theory about the ideal income tax, developed by economists Robert Haig and Henry Simons, defines income as the sum of consumption and the change in net worth. Thus, Haig–Simons calls for taxation of unrealized gains. The idea is that people with higher or increasing incomes have more ability to pay taxes.

The actual system of taxation has been viewed as intellectually compromised because it taxes only upon realization. Progressive legislators and President Joe Biden proposed to tax unrealized capital gains.

Asset values may increase for two reasons: increased net cash flows and changes in interest rates. In the first, the actual cash income produced by an asset increases. In the second, the cash income remains constant but is more valuable because real interest rates decline. An increase in tax despite a constant flow of income is inconsistent with “ability to pay.”

Modern financial research has provided considerable evidence that fluctuations in asset prices arise primarily from fluctuations in interest rates and not from cash flows. The large increase in the value of assets since the 1980s is the result of declines in interest rates. Thus, taxing only on realized capital gains has made an intellectual comeback.

Fox and Liscow’s paper uses data to analyze the use of the “buy, borrow, die” strategy among the wealthy. The Federal Reserve’s Survey of Consumer Finances oversamples the rich and reports comprehensive measures of wealth, unrealized gains, and borrowing, as well as much tax data. Aggregate borrowing by the top 1 percent wealth-holders in 2022 was only about 2.4 percent of economic income in 2022 and 1.0 percent of income for the top 0.1 percent of wealth holders. New unrealized gains were much larger: 33 percent of income for the top 1 percent and 50 percent of income for the top 0.1 percent. Hence, there’s very little “buy borrow, die” going on. Instead, wealthy Americans’ tax strategy appears to be “buy, save, die.”

>Nonpoint Source Pollution Trading

• Raff, Zach, et al., 2025, “The Differential Benefits of Market-Based Water Pollution Control Policy,” SSRN Working Paper no. 5135170, February.

Traditional water pollution control involves the granting of discharge permits to factories and public waste-water treatment plants that have “point sources”: pipes whose discharge into lakes, rivers, and oceans can be monitored and measured. A much more difficult problem is the “nonpoint” runoff from farms, which contains phosphorous and nitrogen from fertilizer and animal manure. Those nutrients fuel algae blooms that appear in the Gulf of Mexico and elsewhere, harming aquatic life. This issue was discussed in articles in the Fall 2010 and Fall 2011 issues of Regulation.

In 2010, Wisconsin required many point sources to reduce their total phosphorus (TP) discharge by over 90 percent. To meet the new limits, point sources could upgrade to tertiary (filtration) treatment technology, or they could pay nonpoint sources (farms) to implement less expensive phosphorous reduction practices.

This paper concludes that technological upgrades resulted in downstream TP concentration reductions of over 29 percent, while payments to nonpoint sources reduced downstream TP concentration by 21 percent. Technological upgrades cost $34,000 per year, while payments to nonpoint sources cost just $5,900 per year. For the state, the 20-year costs of upgraded treatment would be over $7.8 million per year versus $1.4 million per year in payments to nonpoint sources.

>Nordic Inequality and Policy

• Mogstad, Magne, et al., 2025, “Income Equality in the Nordic Countries: Myths, Facts, and Lessons,” SSRN Working Paper no. 5126843, February.

Nordic countries and their generous (relative to the United States) social welfare policies are subjected to much intellectual scrutiny. What are the benefits and costs of such policies? Should the US emulate them?

In previous Working Papers, I reviewed many papers on Nordic policies: maternity leave (Summer 2014), disability policy (Summer 2018), and education subsidies and social mobility (Summer 2021 and Fall 2023). This paper argues that Nordic equality is more the result of wage compression from national collective wage bargaining than redistribution and generous public services.

Free education does little to alter the distribution of educational achievement. The observed distributions of education and skills are relatively similar in the Nordic countries and the United States. But wage coordination in Scandinavia compresses the distribution of wages compared to the distribution of labor productivity. The wage premium for education and skills is twice as large in the US.

This paper reinforces the conclusion of the previous papers I reviewed: Universal generous daycare appears to primarily replace other forms of out-of-home care used by working mothers, resulting in little to no increase in maternal employment or earnings.

What are the lessons for the US? One theory is that the high standard of living in northern Europe is the result of free riding from the innovation that occurs in the US and high incomes paid to innovators. Thus, the US cannot mimic Nordic policy without negative consequences for us and the world. Another theory is that wage compression encourages highly productive firms to expand because labor is cheaper, meaning there would be smaller tradeoffs than what is envisioned in the “free riding” theory. A third theory is that wage compression and social insurance reduce the negative effects of trade and innovation on employment stability and thus reduce political opposition to markets.

How to test these theories? Mogstad et al. write:

Unfortunately, empirical research to date has been limited in its ability to distinguish between the different views about what broader lessons one may draw from the Nordic model and experience. Indeed, most of what we know comes from examples, anecdotes, and cross-country comparisons, subject to the usual criticism of representativeness, omitted variables, and endogeneity.

The evidence is not adequate to guide our choices.

Medical Debt and Credit Outcomes

• Duarte, Victor, et al., 2025, “The Effects of Deleting Medical Debt from Consumer Credit Reports,” NBER Working Paper no. 33644, April.

Before becoming a US senator, Elizabeth Warren was a Harvard Law School professor. In the Spring 2014 Working Papers, I described her research agenda, which emphasized the disproportionate role of medical debt in personal bankruptcy: medical debt over $5,000 was found in half of the bankruptcies studied. As a senator, she proposed the creation of the Consumer Financial Protection Bureau (CFPB) to regulate consumer debt obligations in general and medical debt in particular to reduce the use of deceptive language and onerous burdens in debt contracts.

One in seven Americans carries medical debt. Some $88 billion in medical debt appeared on consumer credit reports as of 2021. The three major US credit bureaus announced in April 2023 that they were no longer including medical debt collections below $500 in credit reports. And the CFPB issued a final rule in January 2025 to eliminate all remaining medical debt collections from credit reports. The claim was that this would enhance credit access and improve loan terms for consumers burdened with medical debt.

This paper compares the effects of these policies by studying individuals with medical debts just above and below the $500 threshold. It finds no differences in credit scores, credit limits and utilization, repayment behavior, payday borrowing, or other related outcomes. So, small medical debts are not relevant for risk pricing, which is why the credit reporting firms voluntarily terminated the use of the information.

The authors then develop credit scoring models using machine learning to evaluate medical debts over and under $500. They find that larger medical debts also have little predictive value for credit outcomes. They conclude that eliminating medical debt from credit reports is unlikely to have any effect on financial outcomes.