The New Neo

[Please also see the ADDENDUM at the end of the post for further details.]

Just when you think Democrats can’t get any worse, along comes an idea like that of Senator Ron Wyden of Oregon:

Under current policy, capital gains, such as increases in value for held stocks, are only taxable when they are “realized.” In other words, if you own stock that increases in value from $1,000 to $1,500, you’re only liable to pay taxes on the $500 increase in value if you sell the stock at $1,500 and “realize” the $500 gain.

Wyden’s idea, on the other hand, would replace this simpler system with one in which capital gains would be taxed annually whether or not they were realized. In other words, if a stock you held increased in value from $1,000 to $1,500, you would still be liable for that $500 gain even if you didn’t sell and the value only changed on paper.

Wyden would counter that this is an oversimplification, and to an extent he would be right. Long-term capital gains, or capital gains on assets held for more than a year, enjoy a substantial zero percent bracket. Yet short-term capital gains, or capital gains on assets held for less than one year, are taxed as ordinary income. Without changes to this structure, Wyden would be imposing a tax on every new asset a taxpayer acquires that gains any value at all during that year.

In addition to all its other flaws, this would be difficult to carry out because the values of many assets are hard to pinpoint until they are sold. And of course, values that rise can fall, and indeed they often do. You can bet your bottom dollar (apt expression) that if an asset’s value declines by the time a person sells it, the IRS isn’t going to refund all those tax dollars paid out over the years.

So this amounts to a tax on the imaginary or at least potential value of assets. Hey, why not? It’s all in the service of making the rich poorer. And Wyden is quick to assure us that this will only affect the rich, the really really really rich, not you and me, so what the hey?:

Sen. Ron Wyden, D-Oregon, announced on Tuesday that he is working on a mark-to-market system that would tax unrealized capital gains on assets owned by “millionaires and billionaires.”…

This levy, assessed annually, would kick in at the same rate as all other income, Wyden said. Currently, the top marginal rate on ordinary income is 37 percent.

In comparison, long-term capital gains are taxed at a top rate of 20 percent.

And capital gains are now taxed only when assets are sold and the gains are realized and not just on paper.

More:

“Everyone needs to pay their fair share and the best approach to achieving that goal is a mark-to-market system that would require the wealthy to pay taxes on their gains every year at the same rates all other income is taxed,” Wyden said in a statement.

Yeah, the wealthy aren’t paying their fair share, according to Wyden and the Democrats—even though the top 1% are actually paying 37.3% of all income taxes in the US. Unrealized gains are not income at all, they’re imaginary and/or potential. Just ask anyone who’s ever lost money in the stock market after seeing a stock’s value rise and then fall, or invested in some antique or collectible that later goes out of favor with the public:

Mark to market is attractive [sic] when the market is going up, but what happens to revenues when it reverses?

My guess is that the government would then say the equivalent of “Too bad, sucker.”

And of course, being a millionaire isn’t quite what it used to be. A million dollars in assets (not to mention unrealized assets) doesn’t go very far at all in places with a very high standard of living.

This particular idea may not be quite as awful as the Green New Deal, but it’s up there. It’s another attempt to spread the wealth around, but this one is especially stupid/pernicious. Here’s the rationale behind it, ostensibly:

Wyden’s proposal would tax assets as soon as the price goes up, rather than when the asset is sold. The logic behind this is simple — paper gains represent real wealth, since you could sell the asset and get cash any time you want. Waiting until the asset is sold in order to tax it allows the wealth to compound untaxed, which causes wealth inequality to accumulate.

At the risk of repeating myself), I will say that as far as “wealth” goes, paper gains represent potential wealth, wealth that is only made actual if and when the asset is sold. The thing itself has no stable value—the wealth it generates depends on what it actually does generate for the seller at the exact time it is sold. What’s more, an unrealized capital gains tax goes against what I understand to be the entire basis of our income tax laws, which is that they are a tax on income both earned (wages, etc.) and unearned (interest, dividends, etc.).

I’ve said many times that finance and economics are not my forte. But I don’t think a person needs to be an expert to understand (correct me if I’m wrong—I know you will!) that there are different kinds of taxes. Many of them involve the use or purchase of something, or the import of something. Some are local, such as sales taxes. Some are federal. There are many kinds, but as far as I know they all involve paying when there is some kind of actual transaction in the real world, except for property taxes, which are on unrealized gains when revaluation occurs but property is not sold (although California’s Proposition 13 modified that somewhat by limiting such increases; see this; also that’s one of the main objections to the “tax/penalty” on not buying into Obamacare).

But property taxes are local, and locally determined. The federal income tax is a different kettle of fish, and far more broad in its reach and scope. To change that from realized gains to unrealized ones is a big big deal, and a big big change rather than a small one.

Oh, and about those millionaires and billionaires, the only ones it will supposedly affect? That’s the sort of thing that was said in order to get the 16th Amendment passed to have a federal income tax in the first place—that it would only apply to the very very rich. Ha, ha! Who got the last laugh?

[NOTE: About the history of the federal income tax and how it was originally sold and perceived:

At first, few thought the income tax amendment had much of a chance surviving a vote in Congress. But the unpopularity of high tariffs eased the amendment through both the Senate and the House. In just a few days during the summer of 1909, the proposed 16th Amendment was approved by the Senate (77-0) and the House (318-14).

Thirty-six state legislatures had to ratify the 16th Amendment before it could go into effect. The public and most newspapers seemed to favor it. The main argument for ratification was that the amendment would force the wealthy to take on a fairer share of the federal tax burden that had in the past been largely carried by those earning relatively little. Only a few critics spoke out forcefully against the amendment. John D. Rockefeller, one of the country’s richest men, stated: “When a man has accumulated a sum of money within the law. . . the people no longer have any right to share in the earnings resulting from the accumulation.”

Ratification moved slowly but steadily through the state legislatures. Some of the states had already passed income tax laws of their own in seeking new ways to finance public schools and other social needs. Surprisingly, the income tax amendment drew widespread support in cities and in rural areas alike, from both Democrats and Republicans, and in all geographical regions. Even New York ratified the amendment despite the state’s reputation as the capital of “money power” with numerous millionaires among its residents (including John D. Rockefeller). By early 1913, 42 states (six more than needed) had ratified the income tax amendment. Only six states rejected it.

Rep. Cordell Hull introduced the first income tax law under the newly adopted Sixteenth Amendment. He proposed a graduated tax starting with a 1-percent rate for incomes between $4,000 and $20,000 increasing to a top rate of 3 percent for those earning $50,000 or more. The House Ways and Means Committee called upon citizens to “cheerfully support and sustain this, the fairest and cheapest of all taxes. . . .”

The first tax collection day under the new law took place on March 1, 1914. Since the average worker earned only about $800 a year, few people actually had to pay any federal income tax. Less than 4 percent of American families made an annual income of $3,000 or more. Deductions and exemptions further shrank the pool of taxpayers. Nevertheless, the federal government collected $71 million that first year. Millionaire John D. Rockefeller alone paid an estimated $2 million.

All in all, most Americans thought the new tax was a great idea. One taxpayer wrote to the Bureau of Internal Revenue, “I have purposely left out some deductions I could claim, in order to have the privilege and the pleasure of paying at least a small income tax. . . .”

We’ve come a long way, haven’t we?]

[NOTE II: The title of this post is a riff on this.]

[ADDENDUM: Just to clarify—I am pretty sure, although I don’t know the details, that a person still could claim a loss if he/she sells the asset at a lower price later on. But the amount of the deduction a person can take for such a loss is limited per year, and meanwhile the person has been paying taxes on gains that never benefited that person at all.

What’s more, an asset might go up for a while and then at some point start dropping, and yet I sort of doubt the IRS starts to pay back the tax by giving a deduction at that time, in a back-and-forth back-and-forth manner, getting money from the taxpayer in up years and giving money back to the taxpayer (in the form of deductions, I assume) in down years, all without any transaction occurring at all except between the IRS and the taxpayer. Although it’s certainly possible that the proposal contemplates just such a messed-up situation.

I’m pretty sure that at least the taxpayer wouldn’t have to pay additional capital gains taxes in the end if the asset is sold at a profit, except for the increase that occurs in that final year before the sale. I haven’t yet been able to find an article that explains these pesky little details in all their glory, but to me they are irrelevant because the principle of the thing is awful.

David L. Bahnsen calls it “extreme, silly, impractical, dangerous, and inane…inherently destabilizing, logistically farcical, and ethically unforgivable.” in National Review, and adds that “we do not tax theoretical income.” Indeed, we do not, except for property taxes (not a federal tax), as discussed earlier. Bahnsen adds about Wyden’s proposal:

…[T]he compliance costs would be the biggest boondoggle our nation’s financial system has ever seen. How in the world is illiquid real estate that has not sold supposed to be “valued” each and every year, let alone illiquid businesses, private debt, venture capital, and the wide array of capital assets that make up our nation’s economy but do not fit in the cozy box of “mutual funds”? What kind of drain to the economy would such an annual exercise in “mark-to-fantasy” represent, as professionals driven by an objective of tax efficiency are tasked with valuing an asset out of thin air?

But let’s ignore that deal-breaker of a problem for a moment. Let’s just assume we are talking about Microsoft stock, which has an easily definable market value and infinite trading liquidity: What should we do each year when the stock price has gone down?…The cluster-you-know-what that would be created in allowing people to take losses year-by-year on investments that have not been sold probably has the most sophisticated and tax-savvy investors salivating at the opportunity to game this mess of an idea to their own favor.

Much more at the link. Much much more.

By the way, let me add that Wyden is no wild-eyed youngster. He’s not only 69 years old, but he’s the top-ranking member of the Senate’s tax committee.

Ron Insana calls Wyden’s idea “beyond ‘breathtakingly terrible'”:

This is yet another full-employment act for accountants, tax attorneys and others who would then create a wide variety of tax avoidance schemes forged from whatever loopholes may arise from new legislation.

Further, unless one is a trader and not an investor (short term versus long term), this idea will add unnecessary volatility to the financial markets and cause pockets of weakness in them when it comes time to pay the piper each and every year…

The proceeds to pay taxes have to come from somewhere, and no investor will take out loans to pay taxes. They will sell stocks and bonds, thereby creating a season of tax harvesting that will depress prices as the bills come due.

Much more at that link, too. Whether Wyden is serious about this or not, it is a very dangerous development that he is talking about it at all, because it’s another sign of how far the Democrats have gone off the rails, making proposals that are obviously destructive to our entire economy.]