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A tax on unrealized capital gains would have unprecedented destructive potential

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If levied, the “billionaire tax” targeting unrealized capital gains would penalize entrepreneurship and have unprecedented destructive potential

The increasingly popular idea that simply ramping up taxes on billionaires such as Jeff Bezos or Elon Musk could solve all the world’s problems is completely misguided and has outcomes that would harm everyone. 

On October 27, 2021, Ron Wyman (D-OR), the Senate Finance Committee Chairman, put forward a proposal for a “billionaire tax” aimed at generating more tax revenue to fund President Biden’s infrastructure projects.

If levied, this “billionaire tax” would be a completely unheard of idea as it would involve taxing capital gains on unsold assets. This proposed tax on unrealized capital gains would penalize successful entrepreneurship and is likely unconstitutional.

What are the details behind this so-called “billionaire tax”?

The proposed “billionaire tax” would target approximately 700 American taxpayers. Those affected would be anyone holding more than $1 billion in assets or earning more than $100 million per year for three consecutive years.

What makes the proposed tax truly unprecedented is that it would be a tax of around 25% levied on unrealized gains. In other words, it would be a tax on investors’ theoretical profits, based on the value of assets they have not yet sold.

To use one case as an example, the anonymous crypto billionaire whose $3,400 investment in SHIB, a memecoin, last year is now worth more than $1.5 billion would owe hundreds of millions in tax under the current proposal. 

Moreover, if the value of SHIB were to suddenly plummet, leaving massive unrealized capital gains, this individual could end up being landed with an astronomical tax bill that would leave them worse off than where they started. That is, if they would even have the means to pay at all. Given the general volatility of assets such as Altcoins, such a scenario would not be inconceivable.

However, not all billionaires would be affected equally by a tax on unrealized capital gains. Those who would be disproportionately affected would be successful entrepreneurs and innovators who contribute to economic growth and prosperity by creating jobs and providing useful goods and services. 

By comparison, individuals who, for instance, inherit billions worth of stock that is not doing particularly well would pay very little in tax, remaining largely unaffected.

Why are people proposing it?

Beyond widespread contempt for successful entrepreneurs, the idea behind this unprecedented new tax would be to collect more tax money to be squandered on a range of new government programs aimed at benefiting key sections of the electorate. As with the global minimum tax rate, the federal government is seeking to increase its tax revenue in order to pay down interest on its immense debt. 

However, it is important to note that the federal government spends a whopping $216,000 per second. It doesn’t have a revenue problem, it has a spending problem. While some may see increased taxation on the rich as a means to avoid confronting the problem of obscene levels of government spending, there are ways in which the proposed plan could backfire spectacularly.

Ultimately, the only viable long-term solution to the problem of government funding would be to rein in the spending of the federal government.

Why would a billionaire tax be a bad thing, surely the rich have piles of cash we could use?

Such a tax would carry severe implications for those forced to pay up. Investors would be sent a tax bill for a sum of money that they typically would not have access to. Billionaires are not Scrooge McDuck figures who sleep on piles of cash. Indeed, most of their wealth is tied up in assets such as shares.

Consequently, lacking in cash, many successful entrepreneurs would be forced to sell shares in their companies in order to pay this new tax. A chain of consequences would result from entrepreneurs being forced to sell their assets. 

Not only would this affect the value of their companies, it would have a detrimental impact on investment, productivity and innovation. Ultimately, the jobs and income of everyone would be at stake.

Furthermore, the raising of tax rates or in this case the introduction of a new tax does not necessarily correlate with increased tax revenue. Indeed, the Laffer Curve illustrates how higher taxes can disincentivize productivity and growth, whereas lower taxes stimulate incentives, promote economic growth, and ultimately lead to higher tax revenue.

While the current idea is concerning enough, we must also consider what this means in terms of opening a can of worms for future tax proposals. As with many precedents, there is no reason to believe that the scope of a tax on unrealized capital gains could not be expanded to affect more and more entrepreneurs whenever the federal government pleases.

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