Senate Finance Committee Chairman Ron Wyden (D-OR) has released the much-anticipated details of the tax on unrealized capital gains for billionaires, as Democrats are working on how they will raise enough taxes to offset their massive spending packages. It is sending quite the ripple among many economic policymakers.
The Democrat’s hopes of including a new tax on the super-wealthy to help pay for their social spending package were fading on as centrist Sen. Joe Manchin (D-W.Va.) said he was uncomfortable with the idea. But this is just a snag … a wealth tax will eventually come.
What are unrealized capital gains?
An unrealized loss occurs when a stock decreases after an investor buys it but has yet to sell it. If a large loss remains unrealized, the investor is probably hoping the stock’s fortunes will turn around, and the stock’s worth will increase past the price at which it was purchased. If the stock rises above the original purchase price, then the investor would have an unrealized gain for the time they hold onto the stock.
What is the current Democratic proposal to tax unrealized capital gains?
It is believed that this would affect about 700 of America’s most important taxpayers. See here the actual proposal. From a high-level view, the proposal includes:
- An unrealized loss occurs when a stock decreases after an investor buys it but has yet to sell it. If a large loss remains unrealized, the investor is probably hoping the stock’s fortunes will turn around, and the stock’s worth will increase past the price at which it was purchased. If the stock rises above the original purchase price, then the investor would have an unrealized gain for the time they hold onto the stock.What is the current Democratic proposal to tax unrealized capital gains?It is believed that this would affect about 700 of America’s most important taxpayers. See here the actual proposal.
From a high-level view, the proposal includes:
For highly liquid investments, such as stocks, applicable taxpayers would pay taxes on gains or claim deductions (if they ended up with a portfolio-wide loss) annually. Billionaires would be able to carry forward losses or carry back losses for three years in some circumstances.
For non-liquid assets like real estate, billionaires would not pay taxes annually on the gains but would pay a charge, on top of regular capital gains taxes, when they sell the assets. The tax would also impose levies on billionaire ownership stakes in businesses incorporated as pass-through entities and in trusts including real estate investment trusts, according to a statement.
Senator Wyden claims that billionaires are “hiding” assets by simply not selling them and passing them down to their heirs and implied that this act of generational wealth transfer is inherently “unfair.” Others want to tax the rich – see the antics of Alexandria Ocasio-Cortez here.
Billionaires disagree like Leon Cooperman. He said, “It’s a stupid idea,” who warned of “unnatural” economic reactions. “The progressives are out to lunch,” he added. “We should not be attacking wealthy people. Are we a capitalist nation, or are we a socialist nation?” See Sen. Elizabeth Warren’s response to Leon Cooperman, “Leon Cooperman, I’m looking at you, baby.”
Here was Elon Musk’s response. Being now the world’s richest man, he took a more philosophical approach to the idea.
What is the likelihood that these unrealized capital gains taxes will pass, and will they stop at these 700 billionaires?
Given the control the Democrats have with the presidency and Congress, the likelihood is reasonable, though for sure it may take time to eventually get something passed. Furthermore, as Musk says, they will not stop at 700 billionaires. They will eventually come for YOU!
Look, politicians have promised far too much to their voters. Federal and local governments are heavily in debt, and it is growing exponentially. The U.S. has reportedly $96 Trillion in unfunded U.S. Medicare and Social Security Benefits alone. As much as the billionaires have, governments will need to go after regular taxpayers eventually. Billionaires simply don’t have enough money. Besides, billionaires, due to their size, can find ways to avoid these taxes anyway – regular taxpayers will not have these same options.
Government deficit spending and central bank endless currency debasement merely make the rich richer while the poor tread water at zero. The rich can borrow money at today’s value and pay it back at tomorrow’s lower debased value – with leverage, one can create massive wealth. Poor are locked out of the game with no assets. Middle-class homeowners have somewhat participated in this game via the wealth massed in their homes.
And what of the renter class? In a socialist government paradigm designed by Democrats, will it be politically saleable to have two classes, renters and homeowners, where one group makes massive profits, and the other makes zero? A socialist government will need to figure out a way to redistribute wealth. It looks like they have found a way.
Example of how these unrealized capital gains taxes could work for the typical homeowner.
You buy your home, let’s say $100,000. Over time, or worse yet, an economic crisis causes the government to massively debase the currency, sending home prices through the roof. Your house is now worth $200,000. You also have an unrealized capital gain of $100,000. With a rising capital gains rate of 40%, thanks to our politicians, you have a tax liability of $40,000 – payable in the coming taxable year.
You may think this is bad for the homeowner but think of the renter class. The renter class is paying higher and higher rents every year with no increasing assets. The unrealized capital gains tax could become the mechanism for socialists to redistribute wealth among the economic classes in an ever-worsening currency debasement environment.
The homeowner has two options to remedy their $40,000 tax liability.
- If one does not have an extra $40,000, the homeowner will need to borrow the money to pay their tax. The monthly cost for the additional borrowing eliminates the homeowner’s advantages over the renter class. The homeowner may eventually, under this scheme, decide not to play the game taking the market risk and joining the renter class.
- If the homeowner can not borrow $40,000, they will be forced to sell to pay their tax. The remaining funds could be used to buy a smaller home. After a couple of iterations of this process, the homeowner will then become part of the renter class.
The net results of unrealized capital gains taxes.
Notice the results of both these options in our example, the homeowner’s wealth is absorbed by the government, and the homeowner joins the renter class and owns nothing. This sounds eerily familiar.
A World Economic Forum (WEF) supposed “The Great Reset” conspiracy theory made a big splash recently. One of the most alarming commentaries coming out of this was, “You will own nothing, and you will be happy.” The friends at the WEF tried to fact check it as false – but not very credibly, saying:
… the piece aimed to “start a discussion about some of the pros and cons of the current technological development. When we are dealing with the future, it is not enough to work with reports. We should start discussions in many new ways. This is the intention with this piece.”
A nice dodge by the WEF, but still, it was always a head-scratcher in how we could turn all the homeowners into the renter class. Unrealized capital gains taxes gives these elites the mechanism to accomplish this goal – time will tell if this becomes a reality.
Whether the ex-homeowners or renter class will be happy is another matter. We suggest not.