Publisher, The Lead-Lag Report
Open mouth.
Insert foot.
That seems to be the default for politicians who have an uncanny ability to talk without any clue about what they’re saying.
I wish they wouldn’t, but it seems to be a requirement for getting votes.
Frankly, this behavior is irresponsible and dangerous.
Take Kamala Harris’s plan to not only raise the capital gains tax but also tax unrealized capital gains for those with a net worth that exceeds $100 million as the most recent example.
Should it pass, it will set a dangerous precedent for the economy and market.
Unrealized capital gains happen when an asset’s value goes up from the price you bought it at. Think of this as paper profits.
You buy a stock for $10 per share. The next day, its price jumps to $12, but you don’t sell. That $2 difference is an unrealized capital gain.
Even though your net worth might have gone up by $2, it’s still exposed to future changes unless you sell.
You realize those capital gains when you sell an asset for more than you paid for it. The money you make from the sale counts as your realized gains.
Realized capital gains have a set, known value. They’re the recorded amount of a done deal. Unrealized capital gains keep changing. They show how much an asset is worth at any point while you still own it.
So the question here becomes: How in God’s name can you properly tax a moving target?
The obvious answer?
You can’t!
Kamala’s tax proposal would make ultra-wealthy households pay a yearly minimum tax of 25% on their total income and unrealized capital gains.
The idea is to tackle the issue of rich people living on unsold and unrealized assets while dodging taxes. On the surface, that seems pretty noble (if you’re not one of the rich people facing this gun).
The problem is, once you do this to the ultrarich, you allow for the possibility that it happens to everyone else. We’d ALL be paying taxes on values we never get. I don’t know about you, but that would put me off making long-term investments. I’m willing to bet it would have the same effect for you and most other people.
The proposal’s details remain uncertain, as neither the Biden administration nor the Harris campaign have given specifics on how to enact or enforce it.
Still, the absence of a working model for a wealth tax on securities raises concerns about valuation and enforcement for private and illiquid assets. How in the world could you tax investments that aren’t mark-to-market? Again – the answer is you really can’t. And there are all sorts of unintended consequences that would hit as a result.
If put into action, this plan would cause a revolution in U.S. tax policy. And undoubtedly, the legal standing of this kind of tax would face challenges.
Worst of all, it could crush the stock market because if you tax unrealized gains, it could force sales to raise liquidity just to pay the government.
It would unleash a volatility tsunami in the stock market each year around tax deadlines.
And there’s little doubt that it would discourage investing for the long haul.
Imagine buying a house and then immediately having to pay taxes on what it might be worth in 10 years’ time.
It’s wrong.
It’s naive.
It’s insane.
The suggested tax on unrealized capital gains would devastate our system. And it wouldn’t solve the government’s irresponsible spending habits. It would just encourage more of them.
I am not a fan of Donald Trump or Kamala Harris. But this type of policy needs to die right now. As it is, we’re facing another Election Shock, as my friend and Freeport Society friend Charles Sizemore explains in this video. We don’t need this craziness to follow close behind.
Michael Gayed
Publisher, The Lead-Lag Report