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This week's news is covered the idea put forth by Janet Yellen on behalf of the Biden Administration to tax unrealized gains. Bottom line up front is that this will not pass any time soon. But it will still have ramifications and they will be bitter.
My biggest concern is that the fear of taxes will motivate wealthy people to sell in this tax structure versus in the next tax structure. The devil you know versus the devil you don’t sorta thing. Bull markets and bear markets are often touted as rational reactions to price to earnings ratios. However, history has shown it’s driven primarily by the fear of being the one missing out. If the big boys sell, then I’m selling too. Black swans typically come from Washington DC. My concern is that legislative machinations and even the rumors of such will spook investors.
The other concern is that money goes where it treated best. It’s not in banks earning 5% in checking accounts. Money has to go to markets to produce either coupons, yields or growth. Perhaps that’s why so much cash has entered the market. If any type of unrealized capital gain tax is levied, why would you redeploy your assets anywhere. Whatever you invest in and wherever your assets are held, you have to pay rent in the form of an ongoing success tax. Will unrealized losses offset unrealized gains in this tax scheme? I haven’t seen the details, but I doubt it. When money is mistreated it doesn’t get bitter, it gets out of town. Billionaires will simply find tax havens internationally. Perhaps China. Mom and Pop Retail Investor will be stuck stateside.
Billionaires don’t pay one penny more in taxes than they must. They have armies of bean counters standing at the ready. Mom and Pop Retail Investor do not. They simply buy and hold and hope for the best. Unintended consequences of pitting mom and pop investors against the billionaires (a misnomer at $400,000 in income) is that we build back bitter. You see the billionaires will find a way to survive a tax hike. Mom and Pop will wonder how their taxes went up when they simply played by the rules as they were explained to them at the time. By the way, you are Mom and Pop in this scenario.
The current attitude towards people who have money or make money is a bitter jealousy borne of misinformation. None of my clients are greedy, filthy capitalists who have made their money through oppressive or underhanded means. None of them are billionaires, but all of them will be affected. We can only hope the proletariat doesn’t fall for the class warfare. Because if they do, Atlas will shrug.
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