Madflation

 

The Democrats have a new economic strategy.  The first step is to cause inflation with quantitative easing (“sell” Treasury Bills to the Federal Reserve Bank in exchange for printed currency.)  Since these borrowings comprise printed money and don’t compete in the market for funding, they cause little pressure on interest rates.  The Fed can keep rates artificially down.  However, by design, inflation will eventually result (we see it every day) which discounts the value of federal debt owed; i.e., debts will be repaid with inflated future dollars.  Further, to help fund this future debt service, inflation itself is taxed when taxable income is redefined to include unrealized market gains.

What great madness is this?

It is important to remember that federal tax receipts have nothing to do with federal spending.  Deliberately misleading, even fraudulent, estimates of tax receipts are used to politically justify massive increases in government spending.  It’s a cynical game.  Only the federal debt ceiling, that is cumulative spending above cumulative tax receipts, determines the ceiling for future spending levels.  But I digress, this essay is not about the Eschleresque topic of monetary theory and floating currency, it is about the taxing of unrealized gains.

The question arises, as taxation requires the definition of the “income” to be taxed, how will unrealized gains be defined and taxed; that is, will the federal government tax unrealized gains on, say, precious metals, art, antiques, real estate, unlisted stocks, private equity investment, partnership interests, bonds, etc.?  For some of these items, determining unrealized gains will require an appraisal of some sort.  For others, will it rely on spot market prices.

The problems with appraisal are obvious, especially if the taxpayer must pay for the appraisal.  My wildest imagination cannot count the issues of subjective dispute in determining value for most asset holdings.  The easiest thing will be to limit taxable unrealized gains to assets with readily available values; that is publicly listed spot prices.

That’s really what the Democrats are after, wealth tied up in public company equity, debt instruments, and commodities sitting in private brokerage portfolios.  Let me remind everyone that this means that tax liability will be determined based upon a listed market value, no matter how liquid the underlying securities might be.  Your everyday billionaire, whose wealth is determined on this metric, will not be happy.  He or she could easily impact market prices by dumping shares or announcing (a required filing in most cases) a desire to diversify.  Many large mutual funds could exert similar short-term pressure, even if it is contrary to their real objective.  All this would make the public equity markets more volatile and a less desirable place to invest.

If this new “unrealized gain” tax is passed, invested capital will exit its parking place in the public markets.  It will go into other kinds of assets not subject to this tax, like hoarded hard commodities, currencies, collectibles, antiques, art, real estate, private securities, and loans.  Also, taxable unrealized gains are not triggered by a liquidity event, so where do the funds come from to pay these new taxes?  Leverage?  Liquidation?  Leverage is risky.  Devaluation of assets underlying unrealized gains could cause a crisis of margin; that is calls on the debt underlying the funds used to pay the tax.  Further, liquidation puts downward price pressure on the markets.  One could easily see how this could spiral out of control.

There can be no debate here; taxing unrealized gains will devalue and harm the public markets, diminishing value and making it less efficient for financing and valuing free market enterprise.  It would be a hard blow for American commerce to take, and for capitalism generally.  It could easily crash the markets.

We witnessed a crash of confidence in asset valuation less than 20 years ago.  Intervention in the home real estate markets had become the mantra of our politicians and their captive, the mortgage finance bureaucracy.  After the collapse of the S&L’s back in the ’80s and early ’90s (another regulatory government failure) government-sponsored private entities, Fannie Mae and her newly minted twin, Freddie Mac, were repurposed to provide liquidity for the home mortgage market.  These entities used Federal funds to gain a monopoly on home mortgages, rendering banks mortgage brokers and servicing agents bereft of lending risk.  The mortgage finance GSEs were “privatized” and thus began the great bargain with Wall Street, where mortgage capital became collateral for investment vehicles known as mortgage-backed securities.  It gets complicated, but politics demanded the funding of mortgages for buyers with poor credit.  How could we deprive people (read: people of color) of the American Dream of owning their own home even if they had poor credit history and limited means?  New buyers flooded the market.  Eager speculation followed, all using cheap money from Fannie and Freddie.  Valuations soared until the defaults started and the real estate market crashed, followed by the capital markets, saved only by a massive Federal Reserve Bank intervention.  That was the beginning of the great recession, which lasted more than a decade.

Further, the taxing of unrealized gains will more tightly tether the success of the public markets, that is Wall Street, to federal tax receipts.  The federal government’s funding will become even more reliant on a robust public securities market, all the while, ironically, it is the government’s own policies that caused the market’s downward pressure.  If, or rather when, the markets fall, that fall will have an immediate and direct effect on federal tax receipts.  The government’s reaction will be, as always, to lean even more heavily on Keynesian stimulus and currency manipulation in the form of quantitative easing.  None of this is good as it makes the economy more volatile, fragile, and prone to inflation, or worse, deflation.

If faced with a weakened economy in recession or worse, the politicians’ next move might well be to expand this unrealized gain tax to other classes of assets .like private equity holdings, real estate or collectibles.  This is a nightmare and will make criminals of everyone.  If we ever get to this point (and I pray we never will), it will be clear that there is no such thing as private property or privacy in America.  Everything will be controlled by the state.  The authoritarian, statist, Marxist subversion will be complete.

Taxing unrealized capital gains is a horrific idea, the economic equivalent of conducting viral gain of function research in the American public square.  It will kill our free market, liberal experiment and eradicate any hint of an American Dream.  Those who push this tax either know this and desire this result or they are plain idiots.  Either way, they are a threat to America’s future.

It’s madness and must be stopped.

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  1. Stina Member
    Stina
    @CM

    Being dependent on limited range EV vehicles further isolated people from friends and family that are living apart due to economic (job) reasons. Isolation makes us easier to control, especially as all information challenging the orthodoxy is censored online.

    With weakened local connections thanks to social media, we lack local relationships where trust has been replaced with suspicion (due to the highly volatile political climate).

    Cutting us off from friends and family that live in other parts of the state or country makes us an easier to control population.

    We won’t know they did that to us, though, because we will be too busy blaming the gas prices and stupid policies, we’ll just think it’s a byproduct of attempting to save money and not by design

    • #1
  2. Randy Webster Member
    Randy Webster
    @RandyWebster

    Doug Kimball: If we ever get to this point (and I pray we never will), it will be clear that there is no such thing as private property or privacy in America.  Everything will be controlled by the state.  The authoritarian, statist, Marxist subversion will be complete.

    Isn’t that their goal?

    • #2
  3. Ekosj Member
    Ekosj
    @Ekosj

    Doug Kimball: There can be no debate here; taxing unrealized gains will devalue and harm the public markets, diminishing value and making it less efficient for financing and valuing free market enterprise.  It would be a hard blow for American commerce to take, and for capitalism generally.  It could easily crash the markets.

    And that’s a fact.    Could it be that they don’t care?    Wiping out the accumulated savings of tens of millions of Americans seems to be a feature rather than a bug.    Those nasty capitalists are probably Republican white supremacists anyway … they deserve to have their savings wiped out.

    • #3
  4. Nohaaj Coolidge
    Nohaaj
    @Nohaaj

    In an aside, I am shocked there is only a 20 cent upcharge from regular to super premium.

    • #4
  5. Randy Webster Member
    Randy Webster
    @RandyWebster

    Nohaaj (View Comment):

    In an aside, I am shocked there is only a 20 cent upcharge from regular to super premium.

    I don’t see any decimal points.  I’m thinking it’s $20.

    • #5
  6. Ekosj Member
    Ekosj
    @Ekosj

    Until the Politicos propose doing away with the “carried interest” loophole that allows the Hedge Funders to minimize their taxes you know that it’s not about raising revenue but punishing opponents.

    • #6
  7. BDB Coolidge
    BDB
    @BDB

    This is mark-to-market for Main Street.

    • #7
  8. Doug Kimball Thatcher
    Doug Kimball
    @DougKimball

    Randy Webster (View Comment):

    Doug Kimball: If we ever get to this point (and I pray we never will), it will be clear that there is no such thing as private property or privacy in America. Everything will be controlled by the state. The authoritarian, statist, Marxist subversion will be complete.

    Isn’t that their goal?

    I don’t believe that the majority of Democrats want that.  They think that the American experiment is immutable.   They go along with these crazy schemes because they believe it will cement their support and endear them to the leadership.  They do not see the consequences, and if they are bad, then they’ll fix it when it needs to be fixed.  

    • #8
  9. Addiction Is A Choice Member
    Addiction Is A Choice
    @AddictionIsAChoice

    Doug Kimball: It would be a hard blow for American commerce to take, and for capitalism generally.

    By design.  Close all avenues of wealth-creation.  They can’t compete with Capitalism so they sabotage it.

    • #9
  10. David Foster Member
    David Foster
    @DavidFoster

    “Further, to help fund this future debt service, inflation itself is taxed when taxable income is redefined to include unrealized market gains.”

    Even when only realized gains are taxed (ie, the present situation), inflation leads to taxing of gains that don’t exist at all in a real (inflation-adjusted) sense.

    There was a nice video done on this about 10 years ago:

     

     

    • #10
  11. Spin Coolidge
    Spin
    @Spin

    Doug is there an active effort in Congress to tax unrealized gains?  If so can you point me to it please?

    So we are clear, I’m not saying there isn’t, just asking you to enlighten me if there is.

    Second, I recently got a statement from our assessor’s office.  The estimated value of our home went up, again, and so does our property tax.  Isn’t this in essence the taxing of unrealized gain?  

    • #11
  12. Vance Richards Member
    Vance Richards
    @VanceRichards

    This is a horrible idea. And how would it work with losses? If you paid tax on an unrealized gain and then the next year the market tanks and you have an even larger unrealized loss, do you get a big refund?

    • #12
  13. Bishop Wash Member
    Bishop Wash
    @BishopWash

    Nohaaj (View Comment):

    In an aside, I am shocked there is only a 20 cent upcharge from regular to super premium.

    Around here I think it’s about 20-25 cents between each grade so it’s a 40-50 cent upcharge to super premium.

    • #13
  14. Randy Webster Member
    Randy Webster
    @RandyWebster

    Vance Richards (View Comment):

    This is a horrible idea. And how would it work with losses? If you paid tax on an unrealized gain and then the next year the market tanks and you have an even larger unrealized loss, do you get a big refund?

    Get real.

    • #14
  15. Bishop Wash Member
    Bishop Wash
    @BishopWash

    Spin (View Comment):

    Doug is there an active effort in Congress to tax unrealized gains? If so can you point me to it please?

    So we are clear, I’m not saying there isn’t, just asking you to enlighten me if there is.

    Second, I recently got a statement from our assessor’s office. The estimated value of our home went up, again, and so does our property tax. Isn’t this in essence the taxing of unrealized gain?

    Secretary Yellen was talking about it this weekend. Barrons and WIBC were the first two sites on my search.

    • #15
  16. Fritz Coolidge
    Fritz
    @Fritz

    Spin (View Comment):

    Doug is there an active effort in Congress to tax unrealized gains? If so can you point me to it please?

    So we are clear, I’m not saying there isn’t, just asking you to enlighten me if there is.

    Second, I recently got a statement from our assessor’s office. The estimated value of our home went up, again, and so does our property tax. Isn’t this in essence the taxing of unrealized gain?

    @spin

    I have seen it alluded to as being in the upcoming massive “reconciliation” bill that is stalled in in-fighting between the radicals and the so-called moderate Dems. But no one has published any text and the CBO has not received a bill to score. Yet.

     

     

    • #16
  17. Doug Kimball Thatcher
    Doug Kimball
    @DougKimball

    Spin (View Comment):

    Doug is there an active effort in Congress to tax unrealized gains? If so can you point me to it please?

    So we are clear, I’m not saying there isn’t, just asking you to enlighten me if there is.

    Second, I recently got a statement from our assessor’s office. The estimated value of our home went up, again, and so does our property tax. Isn’t this in essence the taxing of unrealized gain?

    Look here.  Local property taxes are excise taxes paid every year on some kind of appraised value on your real estate.  Unrealized taxes on portfolio gains are paid incrementally as net gains (or losses) are measured annually.   

    • #17
  18. Spin Coolidge
    Spin
    @Spin

    Doug Kimball (View Comment):

    Spin (View Comment):

    Doug is there an active effort in Congress to tax unrealized gains? If so can you point me to it please?

    So we are clear, I’m not saying there isn’t, just asking you to enlighten me if there is.

    Second, I recently got a statement from our assessor’s office. The estimated value of our home went up, again, and so does our property tax. Isn’t this in essence the taxing of unrealized gain?

    Look here. Local property taxes are excise taxes paid every year on some kind of appraised value on your real estate. Unrealized taxes on portfolio gains are paid incrementally as net gains (or losses) are measured annually.

    Unfortunately WSJ wants me to sign in…

    • #18
  19. kedavis Member
    kedavis
    @kedavis

    Randy Webster (View Comment):

    Vance Richards (View Comment):

    This is a horrible idea. And how would it work with losses? If you paid tax on an unrealized gain and then the next year the market tanks and you have an even larger unrealized loss, do you get a big refund?

    Get real.

    My guess is, you get nothing if there’s a loss in value.  And the next time there’s an increase in value, maybe not even back to what it was before, you get taxed again.

    • #19
  20. David Foster Member
    David Foster
    @DavidFoster

    Some of these Dem proposals would also be very harmful to the funding of startup ventures and early-stage companies.  The nature of investing in such companies is that you get a lot of failures and an occasional home run.  If unrealized games were taxed, it could make it difficult to hold such homerun investments for a number of years…particularly when the unrealized-gain taxing is combined with the proposed capital gains tax increase for people with higher incomes (in a particular year) and the effects of inflation.

    The Dem draft tax proposal, as of about a month ago, also called for drastically cutting the benefit of the Qualified Small Business Stock tax incentive. (which requires holding the stock for 5 years)

    And there are also proposals to restrict the investment options of Self-Directed IRAs…see this article:

    https://www.entrepreneur.com/article/390076

    In the Democrat worldview, all of these harms to the investment process are actually *benefits*, since innovation investments would increasingly be those directed by the government and steered toward politically-favored industries, technologies, and groups.

     

    • #20
  21. DonG (CAGW is a hoax) Coolidge
    DonG (CAGW is a hoax)
    @DonG

    Vance Richards (View Comment):
    This is a horrible idea. And how would it work with losses? If you paid tax on an unrealized gain and then the next year the market tanks and you have an even larger unrealized loss, do you get a big refund?

    This is how realized cap gains currently work.  Instead of refund, you get to write-off other gains and I think a small amount of other income.  Any extra loss is “banked” as a carry-over loss. 

    Losses will be less likely with our galloping inflation.  (that’s a term).

    My state (Texas) is very good at assigning annual value to residential real estate.  It is easy as there are *many* comparable sales.  Big commercial real estate is tough to value and the pro’s are good at low-balling.  Big buildings are kind of unique and the cash-flow/rent method only works if things are rented on the market.

    As things get less liquid (the market is small) valuing will get more and more subjective. 

    I am confident the people writing the tax law (lobbyists) will create loopholes for the special people.  Capital will move from productive businesses to race horses like it did in the 70’s.

    Elon Musk’s wealth hit $250Billion today.  All of it is unrealized gain.  Tell me how that is going to work.

    • #21
  22. Addiction Is A Choice Member
    Addiction Is A Choice
    @AddictionIsAChoice

    In addition to “Reimagining the Police,” we’re “Reimagining the Value-Added Tax.”

    • #22
  23. Clifford A. Brown Contributor
    Clifford A. Brown
    @CliffordBrown

    Randy Webster (View Comment):

    Doug Kimball: If we ever get to this point (and I pray we never will), it will be clear that there is no such thing as private property or privacy in America. Everything will be controlled by the state. The authoritarian, statist, Marxist subversion will be complete.

    Isn’t that their goal?

    The bug is the main feature.

    • #23
  24. Clifford A. Brown Contributor
    Clifford A. Brown
    @CliffordBrown

    David Foster (View Comment):

    In the Socialist Democrat worldview, all of these harms to the investment process are actually *benefits*, since innovation investments would increasingly be those directed by the government and steered toward politically-favored industries, technologies, and groups.

    Exactly so.

    • #24
  25. Django Member
    Django
    @Django

    Spin (View Comment):

    Doug is there an active effort in Congress to tax unrealized gains? If so can you point me to it please?

    So we are clear, I’m not saying there isn’t, just asking you to enlighten me if there is.

    Second, I recently got a statement from our assessor’s office. The estimated value of our home went up, again, and so does our property tax. Isn’t this in essence the taxing of unrealized gain?

    Mark Levin is doing a rant about this even as I type.

    Taxing Unrealized Capital Gains: A Bad Idea | National Review

    • #25
  26. BDB Coolidge
    BDB
    @BDB

    DonG (CAGW is a hoax) (View Comment):
    Losses will be less likely with our galloping inflation. 

    I suspect that this is incorrect, or else we would rejoice at inflation.  I think that losses will become the majority of activity, but will “seem” to be matched by gainswhen assets are taken over and reincorporated or whatever.  For the guy who took losses, those losses are permanent.  Then the next guy wins, and gets the crap taxed out of him, and then his enterprise as well collapses.  Nothing keeps up with inflation.

    I realize that you’re not calling inflation a good thing or pretending that the “gains” are meaningful.  I just think that the House problem with the Martingale strategy comes into play.  Losses are realized in the majority viz gains, because losses either force you out, or tap you out, unless you can ride the loss.  Gains never force realization.  Inflation will just make all the existing problems worse.  A basket of stacks is still a collection of individual bets, which in the aggregate may take gains but must take losses.

    Martingale — is that the right term?

    And I am not an expert.

    • #26
  27. Flicker Coolidge
    Flicker
    @Flicker

    Spin (View Comment):

    Doug is there an active effort in Congress to tax unrealized gains? If so can you point me to it please?

    So we are clear, I’m not saying there isn’t, just asking you to enlighten me if there is.

    Second, I recently got a statement from our assessor’s office. The estimated value of our home went up, again, and so does our property tax. Isn’t this in essence the taxing of unrealized gain?

    This is a complete explanation by Yellen.

     

    • #27
  28. kedavis Member
    kedavis
    @kedavis

    Spin (View Comment):

    Doug is there an active effort in Congress to tax unrealized gains? If so can you point me to it please?

    So we are clear, I’m not saying there isn’t, just asking you to enlighten me if there is.

    Second, I recently got a statement from our assessor’s office. The estimated value of our home went up, again, and so does our property tax. Isn’t this in essence the taxing of unrealized gain?

    Among many of my quirks, I’ve long thought that a property tax assessment should have the legal position of being a firm offer to buy at the given price.  It might cool down the rising assessments if taxing authorities were faced with the possibility of being told “you think it’s worth that much, it’s yours.  Give me the money.”

    Of course there are ways to fake that, such as by saying that a $100,000 house is “assessed” at $1,000 and the tax rate is 100%.

    • #28
  29. Vance Richards Member
    Vance Richards
    @VanceRichards

    • #29
  30. kedavis Member
    kedavis
    @kedavis

    Doug Kimball:

    Madflation

    Doug KimballDoug Kimball 

     

    Seems like a good place for this again:

     

    • #30