Is Unrealized Capital Gains Tax A Bad Idea ?
Dear Friends & Neighbors,
Here’s an abstract illustration representing the idea that taxing unrealized capital gains is problematic. It conveys the financial strain and volatility associated with the policy. (Source: AI generated, by ChatGPT, prompted by MathladySusan, Presented at: WindermereSun.com)
(Please click on red links and note magenta)
As of now, the Biden administration has not officially proposed any comprehensive unrealized capital gains tax. However, there have been discussions and proposals related to addressing unrealized capital gains in certain contexts.
An unrealized capital gains tax would tax the increase in the value of assets, such as stocks or real estate, even if the owner hasn’t sold the asset to realize the profit. Here are some reasons why such a tax is considered problematic:
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Liquidity Issues: Taxing unrealized gains can create cash flow problems, as the owner would need to pay taxes without actually receiving any cash from selling the asset. This could force individuals to sell investments to cover tax liabilities, disrupting their financial planning.
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Valuation Challenges: Determining the fair market value of certain assets, especially illiquid ones like private businesses or real estate, can be complex and subjective. This could lead to disputes over valuations and inconsistent tax assessments.
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Volatility: Market values fluctuate, so assets could lose value after being taxed on their unrealized gains. This would effectively tax people on “phantom income” that may not exist later, leading to financial losses.
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Impact on Long-term Investment: The tax could discourage long-term investing, as investors might prefer to sell assets more frequently to avoid being taxed on temporary gains. This could disrupt market stability and reduce the incentives for holding investments over time.
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Compliance Costs: Implementing and enforcing an unrealized gains tax would require significant administrative resources for both taxpayers and tax authorities. Complex valuation rules and frequent assessments would increase compliance costs.
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Economic Distortion: Such a tax could distort economic decisions, with investors avoiding assets that are hard to value or volatile to minimize their tax burden. It could also incentivize individuals to keep assets in less productive uses to avoid triggering a taxable event.
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Potential Constitutional Issues (U.S.-Specific): In the United States, some argue that taxing unrealized gains could be considered a direct tax without apportionment, potentially violating the Constitution.
Furthermore, taxing unrealized capital gains could have several potential impacts on innovation and small businesses:
1. Reduced Incentives for Investment:
- Taxing unrealized gains may discourage investment in startups and innovative companies, which often require patient capital. Investors may be less willing to commit funds if they face tax liabilities on paper gains that haven’t been converted into actual profits.
2. Cash Flow Issues:
- For small businesses and entrepreneurs, taxation on unrealized gains could pose a significant cash flow problem. They would need to pay taxes on value increases that haven’t been monetized, potentially forcing them to sell shares or assets to cover the tax bill. This could disrupt long-term growth plans and strategic investments.
3. Impact on Venture Capital and Private Equity:
- Investors in venture capital or private equity funds, who often hold illiquid positions in startups for many years, could face higher tax burdens under such a policy. This might reduce the availability of funding for new and growing businesses, as investors seek more liquid and lower-risk investments.
4. Implications for Employee Stock Options:
- For startups that use stock options to attract talent, taxing unrealized gains could make it harder for employees to afford their tax bills, leading to fewer incentives to join or stay with a startup.
5. Discouragement of Long-Term Innovation:
- Innovation-driven industries, such as technology or biotech, often involve long periods of research and development before generating profits. The prospect of being taxed on paper gains could deter investment in these high-risk, high-reward ventures.
6. Administrative Complexity:
- Valuing unrealized gains, especially for private companies or illiquid assets, can be difficult and create administrative burdens. This complexity might disproportionately affect smaller companies that lack the resources to handle the additional compliance requirements.
In essence, while the intention behind taxing unrealized capital gains might be to increase tax revenues from the wealthiest, it could unintentionally hamper investment in innovation and impose financial strain on small businesses.
Description of the video below, in italics, below:
In the video published on Oct 13, 2024, by Tom Bilyeu, as “”Housing Crisis & Rising Costs Will Only Get Worse!” – How We’re Destroying America|Peter Schiff“, below:
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Former SEC Chair Jay Clayton joins ‘Squawk Box’ to discuss the Trump vs. Harris economic agendas, taxing unrealized capital gains, federal price gouging ban, and more, inSNBC Television, as “Former SEC Chair Jay Clayton on taxing unrealized gains, price gouging ban proposals“, below:
Remember your high school economics class? Well, this isn’t your teacher’s dull lecture; it’s real talk about why the proposal to tax unrealized capital gains is a disaster waiting to happen. I’ll break it down using a story that might sound familiar—Mamaw’s house. Imagine the government swooping in to tax gains she hasn’t even cashed in on yet. Where’s she supposed to find the money for that? Spoiler alert: It’s not as simple as they make it sound. If this passes, it’s not just the rich getting hit—it could be you, your family, and your future. If you care about your financial future (or your Mamaw’s), you’ll want to hear this. Don’t miss it—click play to find out what’s really going on and why we need to push back against these bad policies! In the video published on Aug 31, 2024, by Leigh Brown, as “Why Texting Unrealized Gaines Is a Disaster Waiting to Happen“, below:
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Kyla Scanlon speaks with Jason Furman, a Harvard economist who spent 8 years as President Obama’s top economic advisor. Furman argues in favor of the largely unpopular proposal for taxing unrealized gains, explains how tariffs impact economic growth, explains immigration’s role in the labor market, and more, in the video published on Sep 4, 2024, by Public App, as “Harvard Economist Argues in Favor of Unrealized Capital Gains Tax|Jason Furman“, below:
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Andy Blocker, Invesco global head of public policy, and Dan Primack, Axios business editor, join CNBC’s ‘The Exchange’ to discuss how VP Kamala Harris’ proposed capital gains tax could mean for mean for start up businesses, who the policy applies for, and more, in the video published on Aug 22, 2022, by CNBC Television, as “Why Silicon Valley is ‘freaked out’ by Harris’ unrealized apital gains tax plan“, below:
Description of the video below, in italics, below:
In this week’s episode, Falc goes over one of the most controversial plans of Kamala Harris´ 2024 economic plan for her candidacy as president of the United States: a 25% tax on unrealized gains. In this episode Falc goes over all the key points of this economic policy so YOU can make the decision if it is the right choice or not, in the video published on Aug 28, 2024, by Talk 2 See, as “Kamala Harris’ 25% unrealized gain tax plan (the good, the bad and the truth)“, below:
Keep in mind that: The federal income tax in the United States began with the passage of the Revenue Act of 1861, which introduced a tax to help fund the Civil War. However, this tax was short-lived and repealed in 1872. The modern federal income tax was established with the ratification of the 16th Amendment in 1913, which granted Congress the power to levy a tax on personal income without apportioning it among the states based on population. This led to the Revenue Act of 1913, reintroducing the federal income tax in its current form. When the modern federal income tax was first introduced in 1913, it applied only to a fraction of Americans. The tax targeted individuals with higher incomes, exempting most Americans from paying it. The initial tax rate was 1% on incomes above $3,000 for single filers (equivalent to about $90,000 today) and $4,000 for married couples (about $120,000 today), with higher rates for higher incomes. This meant that only about 1% to 2% of the population had to pay federal income tax initially.It took several decades for the federal income tax to expand significantly and apply to a much larger portion of Americans. This shift occurred primarily during World War II. The Revenue Act of 1942 introduced significant changes, including lower income thresholds, higher tax rates, and the expansion of the tax base to fund the war effort. The government also introduced payroll withholding in 1943, which made it easier to collect taxes from a broader segment of the population. By the end of World War II, the federal income tax applied to the majority of working Americans, marking the transition from a tax that initially affected only a small percentage of high earners to one that covered most of the population. So, it took about 30 years—from 1913 to the 1940s—for the federal income tax to become a mass tax affecting the majority of Americans.
Gathered, written, and posted by Windermere Sun-Susan Sun Nunamaker More about the community at www.WindermereSun.com
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