The Democratic proposal to tax unrealized gains is an incredibly bad idea.
The current proposal is on anyone worth more than $100 million with at least 80% of their worth in liquid assets. There are almost too many things wrong with this to list, but hear goes.
- There is no way over time that $100 million will remain the limit. It will soon be $10 million, then $1 million, then $500k, etc. Governments have zero discipline. A new kind of revenue will always be grown. And the only exemption will be for legislators.
- The value of illiquid assets will suddenly become the province of the one entity that stands to gain from inflating that opinion. The moral hazard here is clear.
- The value used for liquid assets will also be incorrect. For valuation purposes of equities, for example, we use the closing price. But this is typically the price of buying or selling a very small number of shares. Anyone covered by the tax will likely own a large number of shares. Forced selling to meet a tax obligation will depress those shares, meaning more shares will need to be sold to raise 25% of the incorrect value, meaning the effective tax will be greater than 25%. Meanwhile, all of our shares will also be worth less, and not for economic reasons.
- Anyone wealthy enough to be covered by the tax initially is also wealthy enough to leave the country. Capital flight will be real.
- The incentive is perverse. One theory of taxation is you tax the thing you want less of. Similar to tariffs, it makes the thing more expensive and incentivizes people to seek alternatives. The alternative to investing is consuming. And like tariffs it makes the alternative more expensive by removing competitive pressure. So we consume more at inflated prices, so we get less.
I am sure there are other reasons as well that I haven't thought of. What say all of you?