Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
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.Published in