The Unrealized Capital Gains Tax: A Foolish and Destructive Proposal
Recently, Democrats have unveiled an ultramillionaire tax, targeting the top 0.05% of American households. One of the key features of this proposed tax is an “unrealized capital gains” tax. While this idea is well-intentioned, it is fundamentally flawed and could lead to significant economic turmoil.
Understanding Unrealized Capital Gains
The term “unrealized capital gains” is a misnomer that creates confusion and sets the stage for potential economic disaster. In financial terms, a capital gain occurs when an asset’s value increases. However, until the asset is sold, the gain is not realized. Therefore, taxing such gains before they are realized is a logical contradiction.
This is not just an abstract concept. It is a principle ingrained in common wisdom, encapsulated in the saying “don’t count your chickens before they hatch.” This adage is based on the fact that future events are inherently unpredictable. The prices of assets can fluctuate, and past performance is not a reliable indicator of future results. Investment advisers are legally required to inform clients that past performance does not guarantee future success.
Practical Implications
Those who advocate for a tax on unrealized capital gains without selling assets are either insincere or lacking in understanding. Prices of assets can go up or down, and there is no way to accurately predict future prices based on current values. Forces such as supply and demand play a crucial role in determining asset prices, and forced sales under the weight of taxes can lead to severe economic disruptions.
For instance, the Internal Revenue Service (IRS) does not recognize barter or exchanges of goods or services for cash, but the principle is that capital gains are only recognized upon sale. Therefore, requiring taxpayers to pay a tax on unrealized gains would necessitate the sale of those assets. This forced sale would inevitably lower market prices, as the seller would need to accept a lower price to meet the tax obligation.
Impact on High-Net-Worth Individuals
A prominent example of the proposed tax's impact is Amazon's CEO, Jeff Bezos. A significant portion of Mr. Bezos' wealth is tied up in Amazon stock. If he were forced to sell part of his holdings to pay the proposed tax, it would have a catastrophic effect on the stock market. This massive influx of stock on the market would flood the market with supply, potentially causing the stock price to plummet.
The financial indices known as the FAANG stocks—Facebook, Amazon, Apple, Netflix, and Google—make up a significant portion of the broader SP 500. These companies have a large percentage of their shares owned by the very individuals who would be targeted by the proposed tax. The potential for a market crash is immense, possibly the largest financial crisis in history, dwarfing even the 2008 global financial crisis.
Broad Implications for the Economy
The negative impacts of the proposed tax would not be confined to high-net-worth individuals and the stock market. Pension funds, insurance, and other financial institutions invested in the stock market would also be affected. This could lead to significant drops in pension values and increases in insurance costs. Furthermore, there is a risk that some banks, particularly those holding large amounts of unsecured or undercollateralized assets, could fail, potentially triggering a new global liquidity crisis.
Defending Against Illogical Proposals
The argument that this tax proposal would merely allow the government to collect capital gains taxes earlier is deceptive and fails to address the real impact. The purported short-term gain is negligible compared to the long-term economic damage. The United States is already $27 trillion in debt, with unfunded mandates like Social Security and government pensions totaling over $159 trillion. The targeted $5 trillion in capital gains is a drop in the proverbial bucket in light of these larger financial obligations.
Moreover, government spending has already been proposed to exceed $5 trillion, which only perpetuates the cycle of overspending. It is a fallacy to believe that any form of taxation, even if applied earlier, would solve these fundamental fiscal problems. Instead, it is a dangerous and shortsighted approach that endangers the stability of the entire economy.
Those who support this proposal are exacerbating a problem that could have devastating consequences. The potential for a global financial crisis and economic collapse should be a stark warning against this ill-conceived policy, which is far more dangerous than any form of socialism or communism.
In conclusion, the “unrealized capital gains” tax is a foolhardy and destructive idea that could destabilize the economy and threaten the well-being of all Americans. It is essential that policymakers critically evaluate such proposals to ensure they serve the long-term interests of the nation.