close
close

A Threat to Economic Prosperity and Personal Freedom – Davidson News

President Biden’s $7.3 trillion budget proposes a federal tax on unrealized capital gains, following the lead of Vermont and 10 other states that have considered similar measures. This tax, which is unfair, likely unconstitutional, and economically harmful, must be rejected out of hand.

Tax on Unrealized Gains: A Threat to Economic Prosperity and Personal Freedom
Tax on Unrealized Gains: A Threat to Economic Prosperity and Personal Freedom

What are unrealized capital gains?

Unrealized capital gains refer to the increase in the value of an asset, such as real estate or stocks, that has not been sold. Taxation on these gains means that individuals must pay taxes on the increased value of their assets, even if they have not sold them and have not realized income.

For example, if you bought a stock for $100 and its value rose to $110 the following year, you would have to pay taxes on the $10 gain, even though you never sold the stock. If the stock were to fall back to $100, the loss would not easily offset the previously taxed gain, creating a complex and potentially unfair tax situation.

Types of taxes on unrealized profits

According to Adam Michel of the Cato Institute, President Biden’s budget includes two main types of taxes on unrealized gains:

  1. Elimination of Step-Up in Basic:This makes death a taxable event, with unrealized capital gains over $5 million for single people and $10 million for married couples being taxed.
  2. New minimum tax: A minimum tax of 25% on income and unrealized capital gains for taxpayers with assets over $100 million, creating a parallel tax system.

Economic and moral arguments against the tax

  1. Dishonesty and property rights: Taxing unrealized gains penalizes individuals for owning assets that appreciate in value without actually realizing income. This violates principles of fairness and property rights that are essential to a free society.
  2. Economic discouragement: The tax discourages investment and capital formation, which are crucial for economic growth. Investors may avoid investing in productive assets such as stocks or real estate, leading to slower economic growth and misallocation of resources.
  3. Innovation and Entrepreneurship: By reducing available capital, the tax stifles innovation and entrepreneurship. Startups and small businesses rely on risky investors, who may be deterred by such a tax.
  4. Personal freedom:This tax violates individuals’ property rights and financial privacy, giving the government too much control over personal assets and discouraging saving and investment.

Detailed research into the economic impact

The economic impact of taxing unrealized capital gains extends beyond individual investors to the broader economy. By penalizing individuals for holding assets that appreciate in value, this tax creates a disincentive to invest in growth-oriented opportunities. For example, investors may be reluctant to invest money in emerging industries or innovative technologies because of the fear of paying taxes on paper gains that have not yet been realized. This hesitation can slow the pace of technological progress and economic development.

The legal and constitutional concerns

The legality of taxing unrealized gains is another major concern. The U.S. Constitution gives Congress the power to tax income, but unrealized gains are not income in the traditional sense. Legal challenges to such a tax are inevitable and could lead to long-term uncertainty and instability in the tax system. This potential for legal disputes adds another layer of complexity and risk for investors, further dampening economic activity.

Historical perspective

Looking at historical precedent, the U.S. tax system has traditionally taxed income that has actually been realized. The principle behind this approach is that individuals should be taxed based on their actual economic transactions, not on hypothetical scenarios. Introducing a tax on unrealized gains would be a significant departure from this principle, potentially setting a precedent for further intrusive and speculative tax measures in the future.

Counterarguments and reality

Proponents argue that taxing unrealized gains addresses income inequality and raises revenue for social programs. However, this tax does not address the root causes of inequality and merely redistributes wealth, thereby misallocating resources. Furthermore, the expected revenues from such a tax are likely to be overestimated because individuals will find legal ways to avoid it, resulting in reduced economic welfare and lower tax revenues.

Furthermore, the administrative burden of implementing and enforcing such a tax would be significant. Valuing assets that are not regularly traded on public markets, such as private companies or real estate, poses significant challenges. The costs and complexity of this process could outweigh the benefits, leading to inefficiencies and potential errors in tax assessments.

International comparisons

Looking at international examples, few countries have successfully implemented taxes on unrealized profits. Those that have attempted such measures often face significant resistance and economic challenges. For example, countries that have implemented similar taxes have seen a marked decline in investment activity and capital flight, with individuals and companies moving their investments to more favorable tax jurisdictions. This global perspective underscores the risks and drawbacks of implementing such tax policies in the U.S.

Conclusion

Taxing unrealized capital gains is an economically unsound and morally questionable policy. It undermines economic growth, stifles innovation, and violates personal freedom. Instead of imposing such misleading taxes, government should focus on cutting spending, taxes, and regulations to encourage investment and economic opportunity. Only then can we foster a truly free and prosperous society.