Marinus van Reymerswaele, Public domain, via Wikimedia Commons
Kamala’s populist, socialist policies extend to taxing unrealized capital gains. Ostensibly, you would pay taxes on the increase in value of your stock portfolio or your home, even if you did not sell it.
Will she also give a tax credit if your house goes down in value?
Taxing unrealized capital gains is a violation of personal property rights, discourages saving and investing, and could force people to sell their homes if they lack the liquid funds to pay the tax. Taxing unrealized capital gains means imposing a tax on the increase in the value of an asset that a person owns, even if the asset has not been sold. Typically, capital gains are taxed when the asset is sold, and the gain is “realized” because the owner has converted the asset’s value into cash or another asset.
However, with a tax on unrealized capital gains, the government would require individuals to pay taxes on the increased value of their assets, such as stocks, real estate, or other investments, even if they haven’t sold those assets and haven’t received any actual income from them.
The idea is to use taxation as a means of preventing people from becoming wealthy or from passing on an inheritance to their children. This type of tax would involve assessing the value of assets regularly and could lead to significant tax liabilities for individuals who haven’t actually realized the gains in cash.
The bill created by taxing unrealized gains could force people to sell assets just to cover the taxes, creating liquidity problems, especially for those whose wealth is tied up in illiquid assets like real estate.
It would also require accurately assessing the value of assets on an ongoing basis. The valuation of non-publicly traded assets is subjective and debatable for investment vehicles such as private businesses, copyrights, and patents, intellectual property, memorabilia, or art.
Implementing a tax on unrealized gains would ultimately mean that the government, not the free market, would determine the value of property.
Even real-estate valuation can be the subject of debate, which is at the core of Trump’s New York legal battle.
Market volatility causes valuations to fluctuate. Would taxes be refunded if the value of the asset drops below its previously assessed value? And what about inheritance? Liberals oppose the idea that people can bequeath their property to their children. Upon bequeathal, would the heirs pay capital gains tax on the property? Would the property have to be sold in order to pay the taxes?
Taxing unrealized gains could discourage saving and investing, as individuals might be less willing to invest in assets that could generate large tax bills before they actually see any financial benefit. Furthermore, it is unfair to tax “paper gains” that haven’t been realized, as it taxes individuals on potential wealth rather than actual income. This approach could be seen as penalizing people for holding onto assets over the long term. It also violates private property rights, as it represents a forced transfer of private property to the government.
There are concerns that taxing unrealized gains could have broader economic impacts, such as reducing overall investment in the economy, leading to slower economic growth and potentially negative effects on job creation and innovation. Entrepreneurship is driven by the pursuit of future profits. Taxing unrealized gains could discourage entrepreneurial risk-taking, as entrepreneurs might face tax liabilities on paper gains before their ventures have generated actual profits. This could stifle innovation and reduce the dynamism of the economy.
Taxing unrealized gains can be viewed as a disincentive to save and invest, as individuals might be penalized for holding assets that have increased in value, even if they haven’t sold them. This could lead to reduced capital formation, which is essential for long-term economic prosperity. People might shift to either spending rather than investing, or they would only invest in short-term projects to stay liquid when taxes are due. This would lead to suboptimal economic behavior, such as short-termism.
Kamala’s plan to tax unrealized capital gains would expand the size and power of the government, stifle innovation and job creation, and violate property rights while shifting the U.S. further away from a market economy.
The left likes the idea, however, because it would reduce wealth inequality by making hardworking, thrifty, and wise investors poorer.
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