Taxing Paper Wealth

A new front has opened in class warfare

The Biden Administration is very busy. It’s hard to keep up. Once upon a time – in previous presidencies – there was an outrage of the month. The pace quickened and it was an outrage of the week, then the day. Now it is the outrage of the hour.

Sometimes it’s difficult to focus on one particular egregious policy or action, there are so many from which to choose. But two recent reports stand out. One threatens to upend the dynamic that drives American economic progress. The second stands out as a slap in the face to all who pay taxes and want to have faith in the judicial system. (I will deal with that in the next post.)

President Biden has “expressed support” for an annual tax on the unrealized capital gains of “the wealthy.” That probably sounds swell to a lot of people who have been taught to despise the wealthy (but not the wealth).  But there’s a huge problem here, as Elizabeth Dellinger of Fisher Investments explains:

… economists from the Office for Management and Budget (OMB) see it differently, apparently. Their report redefined income as the increase in wealth from one year to the next—a bizarre methodology that introduces a lot of oddities, in my view. This would be a mere academic curiosity if Congressional Democrats weren’t jawboning about taxing wealthy individuals’ unrealized capital gains as they scramble to rewrite the reconciliation budget bill.

And:

Much of the current push stems from the notion that wealthy people aren’t paying their “fair share,” which the OMB’s analysis aimed to demonstrate. It estimated “the average Federal individual income tax rate paid by America’s 400 wealthiest families, using a relatively comprehensive measure of their income that includes income from unsold stock.” (Italics mine.)

Thing is, these families are not sitting on mountains of gold coins like Scrooge McDuck. Their wealth is predominantly assets—illiquid (businesses, art) and liquid (stocks, bonds). Increases to that wealth exist on paper only. The current proposal to tax unrealized gains would include real estate, which is also quite illiquid—you can’t sell it in a minute and expect to get fair value. Nor is there a way of tracking its market value day by day. Like all illiquid assets, rising property values are one step away from imaginary.

What happens if this new tax becomes law?

First, lawsuits. Not all billionaires have under-the-table sweetheart deals with the administration, and they aren’t going to take a full-frontal assault on their wealth without fighting back. Nor should they. Leftist hopes to destroy American capitalism could be dashed against the rocks of the Constitution, but the damage to the economy would linger.

Second, changes in behavior. The uber-wealthy are smart and they employ smart people to help them cope with such insanity. They may expatriate to less greedy countries, taking their wealth – not to mention their initiative and the jobs their wealth provides – to greener pastures. The loser in this will be America. Very few jobs are created by people on food stamps. Unemployment will rise; businesses and factories will close. Few will want to invest in a market that could bring upon you catastrophic taxes.

Third, at first the law would be for the billionaire class. It would not stay that way, especially if revenues fall below expectations. Those who would grow government will not be satisfied until these taxes on “paper wealth” are extended downward. Remember your history: the original federal income tax was capped at 7 percent for those considered uber wealthy in 1913. Oh, those were the days!

Ms. Dellinger explains that

… there are two simple reasons capital gains taxes have preferred rates. One is incentivizing long-term investment, which drives job creation. The other is to account for inflation, which can offset a large chunk of long-term returns.

Inflation, which is rocketing now, is the best friend of the socialist mastermind. It provides a never-ending opportunity to “do something,” whether it is instituting new, expensive programs that dictate what people can and cannot do, or increases in taxation when “paper wealth” rises because of inflation.

You see, inflation is not a defect in the current economic situation, it is a feature. But only if you want bigger government and don’t give a damn about capital markets, free enterprise or freedom itself.

There is already too much money (much of it created digitally) chasing too few goods (some of it waiting offshore to be unloaded) which means prices rise. I expect soon to hear calls for wage and price controls, which will solve nothing.

When markets take a downturn, as they will, and the unrealized gains turn into unrealized losses, will the government offer tax credits or rebates? Hell, no! The flow from the private sector to the government is one-way only.

Understand, punishment for the rich will only punish everyone. Whether there are enough intelligent people left to comprehend this, who knows? Whether there are enough men and women in Congress with the common sense and courage to say no, we shall soon see.