Issues & Insights

New Capital Gains Proposal Would Fleece The Middle Class

Sadly, trillion dollar deficits are the new normal in Washington, D.C., and politicians are willing to tax anything and everything to fund their reckless spending habits. Populist calls to “soak the rich” are as popular as ever, despite little evidence that even more progressive taxation would sustain federal coffers for long.

And now, President Joe Biden is calling for an unprecedented 20% minimum tax on unrealized capital gains for high-net-worth households. That’s right, the already overburdened Internal Revenue Service would be tasked with accurately calculating changes in the value of privately held companies and siphoning investments from these companies through a complicated maze of taxes. This would not only mean less money for hiring and workers’ raises, but also guarantee massive stock-selloffs at a time when millions of Americans are readying their retirement accounts. Instead of finding new ways to fleece the American people, the Biden administration should propose trimming the bloated budget.

Ordinary capital gains taxation is bad enough. A slew of public officials ranging from President John Kennedy to President Bill Clinton have recognized that punishing investment deters productive activity and rarely results in lasting revenues for Uncle Sam. But at least capital gains taxation is fairly straightforward to calculate. IRS bureaucrats need only know the investor’s income, size of the investment, initial purchase price, and selling price to figure out the tax owed. But, if tax-hungry politicians get their way, the IRS will have to divine the constantly evolving value of intellectual property, reputational capital, etc. for privately held companies with little market data to rely on.

This would likely result in protracted battles between wealthy investors and the IRS over the value of unrealized gains, with the IRS continually trying to high-ball gains to maximize tax revenues. The IRS winning these battles would mean resources taken from hiring initiatives, training programs, and worker compensation across the struggling economy. The impact over the first couple of years of implementation would be particularly rough, owing to the particularly poor design of the proposal. As Manhattan Institute senior fellow Brian Riedl notes, “the proposal would be retroactive. So someone who started a $1 billion private business 30 years ago could conceivably get a $200 million tax bill in the first year. The business owner would have to either sell the business, or be assessed additional fees to defer the taxes until whenever they wish to sell the business.”

It gets even worse. Business leaders hold significant sums in publicly traded stocks, and usually only sell these shares in significant sums to pay tax bills. The front-loaded, retroactive nature of the law would mean that these sell-offs would be concentrated in the near-future, and stocks would likely take a large tumble as a result. The main casualties of these large share-price declines would be the millions of Americans owning retirement accounts invested in the stock market. And nearly 60% of Americans report owning stock. A large proportion of these investors are far from wealthy. When Elon Musk’s stock sales caused Tesla shares to fall by 15%, ordinary investors felt far more pain than Musk.

Such is the folly of populist tax proposals. Despite the best intentions, policymakers usually succeed only in making it more difficult for middle-class Americans to save for their retirements. And, for all the pain and wage and hiring freezes, the proposal would net just $36 billion per year under the rosiest of assumptions. So much for financing trillion-dollar deficits with a “fair” tax system.

Biden, his administration, and his congressional allies need to make a concerted push to phase out deficit spending and get America back into the black. Real deficit reduction, not tired tax schemes, is the key to renewed prosperity.

David Williams is the president of the Taxpayers Protection Alliance.

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  • This is Biden’s Blueprint for the Marxist Revolution in the USA. This would effectively reverse the Free Market Capitalism that took root and guided the country on the road to Freedom from when the Dutch colony became established in Manhattan. A Big Win for the Democrat party radicals (Marxists & cultural communists), having the USA president openly on their side. Unfortunately, some GOP legislative employees are in on the game, having collaborated to put the Democrat political machine into power in 2020’s still unaudited election with many “irregularities” (e.g. Pennsylvania counted several hundred thousand more mail-in ballots than were mailed out by state government). Now we are paying the price for installing the Anti-Trump president (to prevent normalization of relations with Russia from going forward), from high inflation and a quick doubling of gasoline prices to border surges and rampant crime. A high price for getting the much-coveted war to exterminate Russia into higher gear.

    Biden’s Marxist asset-confiscation “tax” proposals would be a Big Step towards nationalizing all public companies, because half of all stocks and bonds are already held by government pension funds; and these government entities would be exempted from the asset-confiscation “tax” proposal. That is how the Democrat legislative machinery works. Exemptions for the Chosen Ones. Government employees already have Exemptions from the Social Security system (which is for the masses); and get their own asset-rich pension plans (holding half the nation’s publicly traded assets). It is a big difference: Paltry Benefits for Social Security (averages best 38 years) and Big Benefits for government pension plans (averages best 5 years). Not a Marxist classless society, but a consolidation of economic power in a blue state governing class whose lust for absolute power was demonstrated by their dictatorial governance by edict (diktat) during the corona virus pandemic. This is more than a tax proposal, it is the reincarnation of Russia’s Lenin and Stalin in the USA White House.

  • There is no such thing as unrealized profit! It’s not a profit until you sell and make a profit but stupid Joe wouldn’t understand that.

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