Start Date: August 29, 2024
There is an election coming up. One surprise candidate, who fell into the position without any primary or caucus votes, is suggesting a vast array of new taxes. Please don’t give up. This is not an accounting lecture. Well not quite. This is about a reinvention of the notion of ownership, reality, and wealth.
The most striking proposal is something referred to as “Unrealized Capital Gains Tax.” Capital Gain refers to the profit you experience if you sell an asset for a price higher than it’s purchase cost. This most frequently comes in to play with either sale of a home or stocks, but in theory it can apply to any material asset.
IT WILL ONLY APPLY TO “THE RICH”
To be fair, for now, she is only proposing taxing publicly traded assets of high wealth households. Politicians like to suggest their taxes will only affect the very wealthy. But it is unlikely that it will retain those constraints. For one reason, there are not enough of the “Super Rich” to make a difference. Also they have awfully good lawyers and tax accountants, and many are political donors. So allow me the luxury of discussing a broader scenario, and then explain how even the limits of the current plan would be financially catastrophic.
IT ISN’T REAL UNTIL IT IS REAL-IZED
As the law presently exists, tax liability is incurred when the the gain happens, i.e. when you sell the asset. An asset can be a stock, home, boat, artwork, stamp collection, or baseball card, etc. When the sale happens is when the gain is “realized.” Before that, it is simply a notional asset. If you ever watch business news they may suggest that some billionaire CEO gained or lost so many millions or billions in a major change in stock price. While that may someday come to pass, it is not a REAL gain/loss until a sale takes place. But now some politicians want to confiscate your wealth by taking money you do not yet have.
REALITY MAY CHANGE
An unrealized gain tax assumes that the present imaginary gain will become the true gain. That is not always the case. Remember Enron? It was an oil services company. Management told the employees that things were great and they should put all their savings in company stock. Suppose the IRS billed for the imagined gains. Then lo and behold it turns out that the accounting was fudged. The company went bankrupt in 2001. You may have some carryover losses to declare later, but who do you see to get your undeserved but FULLY REALIZED taxes back?
WHEN DID THE NON-EVENT NOT HAPPEN?
Real(ized) capital gains can be crisply defined. You buy something on a given date for a given price. Then you sell it later on a given date for a given price. The time and profit/loss are precise and singular. But if the government wants to tax a transaction that never took place, when did the non-event not happen? So at what date do they define the money you would have made if you sold, though you did not?
Also when does it stop? Suppose you still haven’t sold the asset next year. Are you to be taxed again for what didn’t happen. Are you taxed for further increase which you still have not experienced? How many times do you pay for money you might, but do not, have? And if your assets have gone down, do you get your previous payments returned with interest.
OTHER ASSETS
Suppose they extend this to real estate. Unlikely, but, consider it a national, and larger, extension of your regional property tax. If you are older and have paid off much of your home, and it has greatly increased in value, you might be told by the IRS that you have to pay them somewhere from 1/4 to 1/3 of the value of your home based on the premise that it will someday be sold. But maybe it won’t. It hasn’t been now and you do have to sleep somewhere. So where precisely do you get the money to pay taxes on something you have not sold?
What about more esoteric, yet valuable assets. Your grandmother left you her jewelry, your grandfather his coin collection. What is it worth? That can be flexible. An asset may have a catalog that defines a theoretical value. But for rare items there must be an available and interested buyer. The IRS has a vested interest in ascribing as high a value as imaginable if they are going to take a cut. The Hunter Biden painting that had a value of $250,000 will net a great deal less when his father is no longer engaged in public life. But the IRS will go with the comparable value based on earlier sales. You lose.
SUPPOSE IT IS JUST STOCKS OF $100 MILLIONAIRES, WHY DO YOU CARE?
For argument sake suppose that only Bill Gates, Mark Zuckerberg, Elon Musk, Warren Buffet, Jamie Dimon, and wealthy hedge funds find themselves needing to sell off massive portions of their holdings. The most immutable law of economics is “Supply and Demand.” The supply offered to the market would spike enormously. But there is no corresponding force to increase demand. So prices would plunge. Algorithms would no doubt push prices further downward. This is how you create a crash. Even Ms. Harris’ biggest fan, billionaire Mark Cuban, has indicated that it would destroy the market, which would include him, hence his concern. The market is fair in some ways. If the price of a stock plummets, it does so for all. So wave goodbye to your savings and your 401K.
SINCE WE ARE ACCOUNTING FOR THINGS THAT DIDN’T HAPPEN
Yes this is hyperbole and sarcasm for fun, yet it is thematically consistent.
Will the IRS tax you for the promotion they are confident you will get some day?
If so, can you claim child credits for children you may have some time in the future?
TOMORROW, TOMORROW, ..
The underlying premise of all of this is that the government will steal now in case there is nothing to take later. Slowly they whittle away at your assets.
No one is promised tomorrow. We should plan for the future. But we must live in the present. The IRS and the federal government should constrain itself to do the same.