Erick Erickson warns of a potential disaster:
Democrats, including Joe Manchin, intend to impose an actual and real tax on people’s imaginary money. They are, however, claiming it will only affect the rich. Like the income tax when it was originally enacted, for now that is true. But just as the income tax spread out across the rich and middle class, so too will this real tax on imaginary money.
It is called a tax on “unrealized gains” or an “unrealized capital gains tax.” How it works is very simple. …
This is a terrible precedent. It will also be deeply economically destabilizing. It will require the wealthy sell large amounts of capital to pay a tax on imaginary dollars. That will cause market turmoil. It will cause capital to flow to uncharted places as the wealthy seek to avoid the tax. More importantly, as Nancy Pelosi conceded this past weekend, it will not raise the money Congress needs in any measurable way. This is all about the future precedent of coming after you.
Yahoo! Finance has a report on the proposal:
Sen. Ron Wyden (D-OR), chairman of the Senate Finance Committee, introduced legislation on Wednesday requiring taxpayers with more than $1 billion in assets or more than $100 million in annual income for three consecutive years to pay taxes on unrealized capital gains.
“There are two tax codes in America,” Wyden said in a statement on Wednesday. “The first is mandatory for workers who pay taxes out of every paycheck. The second is voluntary for billionaires who defer paying taxes for years, if not indefinitely.”
The so-called “Billionaires Income Tax” would apply to around 700 taxpayers and raise “hundreds of billions of dollars,” according to the proposal, which comes as Democrats discuss ways to fund their reconciliation package over the next decade.
Unlike other types of income like wages, investors pay tax on capital gains only when they are “realized” — meaning when the assets are sold — compared with a worker who pays taxes as they earn it.
Deferring capital gains taxes allows rich Americans to earn returns on untaxed money until the assets are sold — at which point investors can time the sale to blunt any tax burden. In the meantime, those untaxed gains can be used as collateral for loans.
“If you don’t pay tax on the annual increase in value of your assets, you continue earning returns on money that you would otherwise pay in tax,” Samantha Jacoby, senior tax legal analyst at the Center on Budget and Policy Priorities, previously told Yahoo Money. “It’s an important tax advantage that allows wealthy people to continue building wealth over time.”
Skipping standard inflammatory rhetoric on Erickson’s part, he’s probably not wrong on this proposal. While his headline, “Democrats to Impose a Real Tax on Imaginary Money,” as well as the article, ignores the advantages of unrealized capital gains in favor of ridicule, in its essence it is not wrong: I am not the only investor to have seen outsized, unrealized returns disappear nearly overnight (for the record, I was an investor in the now-defunct NetBank, and while I got out before the collapse, I didn’t escape with my unrealized gains intact; it was, in fact, a salutary and frustrating lesson). The urge to tax the unrealized market gains is not balanced by the actuality of unrealized market losses and how they will be accounted for; I could see millionaires going under because one year they’re taxed for doing well, but cannot balance their losses the next year because that money’s gone.
The urge to avoid taxes – an urge which I fear actually perturbs market behaviors to the extent that it damages many investors’ prospects, legal standing, and emotional stability – is indeed a problematic facet of this proposal. The lack of predictability, and, I even wonder, the possibility of a positive feedback loop, might roil markets and damage economic growth in the long-term.
And I have to wonder anytime complexity is proposed to resolve what is resolvable by other, less complex means. This proposal, so simple in its summary, will be devilish to implement on both sides of the teeter totter – and, as Erickson suggests, it may not be worth the time.
Meanwhile, we know to a reasonable degree of certainty that simply raising taxes will help resolve the funding problem without damaging the economy. How? Because of the utter failure of the Tax Reform Bill of 2017 to accomplish its goals. Rather than spark an economy, via corporate tax cuts, that was already moving right along, it did nothing more than fill investors’ pockets with dividends and accounts with the results of share buybacks. There was no long-term surge of prosperity for workers or anyone else who didn’t have access to the corporate cash register.
I don’t care if Senators Manchin (D-WV) and Sinema (D-AZ) think that raising taxes will discourage the economy, because the available evidence suggests that higher taxes, invested properly into our shared infrastructure, is a net positive, generating jobs and smoothing the bumpy economic road for many businesses. We know this because we’ve traveled the Laffer Curve in Kansas and watched Kansas crash and burn; we can certainly travel the other way on the Laffer Curve and likely see no problems at all, so long as we remember there’s a bell curve involved.
And, in the end, the proposal promises to tax a few hundred people. There’s something to be said for shared pain. While I don’t advocate everyone should see their taxes rise in this proposal, I think it should cover far more people so that we can all say that we’re in this together. This is an inherently divisive proposal, and I worry that we’re just destroying asabiyah (social cohesion) more and more.
