The madness of taxing unrealized capital gains – OpEd – Eurasia Review

By Georg Grassmueck *

President Biden’s proposal to require about 700 US billionaires to pay taxes each year on unrealized capital gains has garnered broad support from Democrats as another step to make the rich pay for uncontrolled government spending. federal. House of Representatives Speaker Nancy Pelosi said Democrats hope the plan would raise up to $ 250 billion to help fund expanding the social safety net and tackling climate change. The current tax system is already too complicated and adding another layer will not make the system fairer or make the rich pay more taxes. More importantly, the proposal is another government ploy that defies reality and again raises questions of government overtaking.

The proposal would reinvent the way the government taxes investments not for everyone but only for the richest few hundred people. Under the current plan under discussion, capital gains on stocks and other traded assets would only be taxed for U.S. taxpayers with more than $ 1 billion in assets or $ 100 million in income for three consecutive years. . It comes down to a different interpretation of the tax code for the rich. When an investor purchases an asset, stock, real estate, or even a business, the asset will hopefully gain in value over time. Currently, the tax code requires the investor to pay capital gains tax only when he sells the asset. However, according to the new proposal, the surplus does not have to be realized in order to be taxed. Lawmakers aim to effectively raise taxes the rich pay by rewriting the rules. Often, investors hold their investments for many years while their assets rise in value, thus avoiding paying capital gains tax for many years, except for income tax on dividends. and other cash distributions of the investment. In theory, a person could accumulate capital gains indefinitely, without ever having to pay tax. The proposal under consideration, the simple increase in the value of a portfolio will be taxed.

While the idea of ​​getting billionaires to pay more of their fair share of taxes seems to garner a lot of popular support from the public, lawmakers are missing a key point in their enthusiasm that rich pay more taxes, the reality of the current tax system. The rhetoric that the super rich get richer during the pandemic without having to pay taxes on increasing wealth while ordinary taxpayers have to pay taxes on their income every year sounds great to the wealthy crowd. Sure, George Soros and other billionaires will comply and hand over their money without resisting. In fact, George Soros applauds and supports this proposal when, according to the ProPublica report in June, Soros has not paid federal income tax for three consecutive years. Likewise, Jeff Bezos and Elon Musk have not paid federal income tax for a few years.

The proposal defies reality because not all assets are as easy to value as publicly traded stocks. For example, a rare but valuable item like a precious painting or a music album like Wu-Tang Clan’s “Once Upon a Time in Shaolin” would be even more difficult to tax, which begs the question of how to assess the value of less liquid the trumps. Billionaires are the type of investors who can afford to buy less liquid investments like rare works of art. More importantly, as people’s wealth increases, there is a greater incentive for them to hire high-priced tax accountants and tax attorneys to fight the internal revenue department every step of the way. Ultimately, the government should be prepared to wage long and complicated legal battles with billionaires to establish what constitutes capital gain.

Even more important is the question of what to do with capital losses. Billionaires not only make money by exploiting the poor, but billionaires are rich because they seize business opportunities that sometimes turn out to be losers. Likewise, stocks and other securities can lose value. Would billionaires receive tax refund checks in those years? For example, what if the stock market drops sharply in December? Would billionaires receive massive tax deductions on unrealized losses in their wallets, leading the IRS to send tax refund checks to Jeff Bezos, Bill Gates and Warren Buffett. Ultimately, this will lead to the question of when the valuations of taxes on unrealized gains would be determined. Lawmakers forget that just because something is rising in value doesn’t mean the owner has the money to pay taxes. The current rationale for taxing capital gains once the asset is sold avoids two fundamental problems with the proposal. First, the market alone should determine the fair market value of an asset, not the IRS on a complicated formula that defies reality. Second, even billionaires may not have the cash flow to pay taxes on unrealized gains. A realized capital gains tax avoids both of these problems, once an asset is sold, the true value is determined and the seller will have the money from the sale to pay the tax bill.

While the current proposal will be supported by a large part of the public because the rhetoric is just too appealing, taxpayers should be alarmed by this proposal. Once lawmakers have the power to tax unrealized gains, it will only be a matter of time before tax-strapped lawmakers set their sights on one of the biggest sources of hidden wealth in the world. ‘IRS, Latent Gains in Real Estate and Mutual Funds. that the public holds. For example, CNBC reported that homeowners with mortgages saw their equity jump 20% in the first quarter from a year earlier, which is a collective cash gain of nearly $ 2,000 billion or so. borrower, the average gain was $ 33,400. Wouldn’t it be nice if the government taxed your home’s capital appreciation every year?

This proposal is dangerous and should be declared unconstitutional. As Mises explained, “’Taxing the rich’ doesn’t make our lives better,” and the new taxes are always a danger to every productive citizen.

Source: This article was published by the MISES Institute