“Oh, what a tangled (tax) web we weave…”

 

Sir Walter Scott coined a phrase in 1808, in his poem “Marmion: A Tale of Flodden Field“, that’s been cited ever since:

“Oh, what a tangled web we weave

When first we practice to deceive!”

I think our politicians have taken the phrase to heart, and regard it as a road map for how they should govern us – by deceit.  This is seen most recently in attempts by the Democratic Party and its office-holders to justify a wealth tax, in the form of a tax on “unrealized capital gains”.

It’s sophistry, pure and simple:  an attempt to get around the clear wording of the 16th Amendment to the U.S. constitutionIt holds alarming implications for every one of us – not just the “billionaires” at which they insist the tax is aimed.

Let’s break it down into bite-sized chunks.

The 16th Amendment states:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

This makes it pretty clear that federal taxes cannot be levied directly upon assets that are not “income” (e.g. accumulated wealth, property, savings, retirement funds, etc.).  Until now, this has stymied efforts by tax-and-spend politicians to grab any and every additional tax dollar and cent they could get their hands on.

The crux of the current proposals is that they reclassify gains in value on paper as actual income.  If, for example, your asset or investment gains value in a given year, even though you did not sell it to realize that gain (i.e. take possession of it in cash, which would be taxable), the authorities want to tax you on the presumed, theoretical gain.

The proponents of this tax swear it’ll only be directed at “billionaires”, so that they pay their “fair share” of the tax burden.  However, that’s a classic case of the camel’s nose getting under the edge of the tent.  If it’s implemented, who’s to say that any and every capital gain, from any and every taxpayer, might not gradually be dragged into in this new taxation net?  This might produce all sorts of complications.

  • If your home appreciates in market value from (say) $200,000 to $250,000 in one year, even if you don’t sell it or plan to sell it, you might find yourself with a tax bill for that $50,000 in unrealized capital gain.  Where are you going to find the money to pay the tax?  And what happens next year, when it gains another (say) $30,000 in value?  You’ll be paying the tax all over again!
  • Inflation wreaks havoc with asset valuations.  Just by holding an asset that doesn’t go up in price, but is valued at 10% more due to inflation as the dollar weakens (which is basically a monetary problem to begin with), you might be on the hook to pay tax on that 10% “adjustment”.
  • What if your property loses value?  Will you be able to claim a tax credit, or refund, on unrealized capital losses?  It would be only fair . . . but can you see politicians willingly allowing such a loophole, once they’ve got their hands on your money?  If you can, there’s a bridge in Brooklyn, NYC I’d like to sell you.  Cash only, please, and in small bills.  (Yes, of course I’ll pay tax on it!  Whaddaya think I am – dishonest, or something?)
  • What if this is extended to currently untaxed savings?  For example, if you have retirement savings in an IRA or 401(K), capital gains are not taxable.  However, if this tax is extended, you might find your accumulated reserves raided for part of their appreciation in value every year.  That might be imposes directly on them, rather than coming out of your pocket, in the hope that you wouldn’t notice . . . but it’d make your retirement savings worth considerably less in the long run.

Sundance points out the dangers involved in tolerating such an extension of the taxation powers of government.  Bold, underlined text is my emphasis.

Taxing “unrealized capital gains” sounds like a catchy and obscure way to make wealthy people pay more in taxes, but it doesn’t work.  A government that moves in this direction ignores the reality that people are not static.  The process also involves “taxing wealth” which then becomes an arbitrary definition.

. . .

There are constitutional issues with the federal government taxing wealth or assets; however, the overarching premise behind every proposal is that all wealth belongs to the government.  You hear this ideological perspective when people say “tax expenditures” or spending in the tax code.  The idea is that your income is what the government permits you to keep, NOT what your labor has achieved.

The ideology behind taxing “unrealized capital gains” is the same ideology in the premise of “sharing the wealth.”    It is an ideology that stems from a belief that your dollar earned comes at the cost of my dollar not achieved.

Beware the voices who would advocate for taxing unrealized gains in wealth as a source of government revenue.  Once you start down the path of taxing wealth you set up a process where the U.S. government controls the limits of where that wealth is defined.   It will never stop at billionaires…

There’s more at the link.

Stephen Green asserts that such a tax will inevitably impact retirement savings (currently exempt from income tax), albeit indirectly.

Let’s pretend for a moment that I’m a young entrepreneur whose company just went public. I’ve been personally scraping by to get my business going, working long hours and not taking much pay. Overnight, though, the shares I hold are worth a billion dollars.

Let’s also pretend that you, gentle reader, are a smart investor who bought a few shares in my IPO and tucked them away in your IRA account.

I don’t actually have a billion dollars. I just have these shares that the stock market values at a billion dollars. But according to Yellen, wealth tax-proponent Elizabeth Warren (D-Mass.) and Presidentish Joe Biden, I “made” a billion dollars yesterday. And being a naughty rich person, I must pay taxes on that money I don’t actually have.

So what do I do? I’m forced to sell off enough shares in my own company to pay the tax bill.

What does that do to you, Mr. or Mrs. Smart Investor? My big sell-off reduces the value of your shares and your retirement account. In essence, you’re paying the “Billionaire Income Tax” even though you aren’t a billionaire and haven’t made any income.

Every year around Tax Day there would be a big sell-off.

So not only is Yellen lying when she says it isn’t a wealth tax, she’s lying when she says it will fall only on the “extremely wealthy.”

Again, more at the link.

Think, too, about what this will mean to politically well-connected companies who might line up to buy your assets when you’re forced to sell them to pay your tax bill.  You have to sell your house?  Blackrock and other investors will gladly buy it from you, to make as much money out of rent, depreciation (against taxes), and so on.  They’ll also have to pay the tax on unrealized capital gains each year:  but for them, it’s a business expense – they can adjust rentals to compensate, and write it off against their income taxes.  As private citizens, not earning income through that asset, we can’t do that.  Effectively, our tax burden would become a subsidy for companies who can write off their tax burden.  Sucks to be us, doesn’t it?

It’s going to be a long, complicated legal fight if this tax proposal becomes law.  Back in 1920, the Supreme Court ruled (in Eisner v. Macomber) that a tax on a pro rata stock dividend (i.e. where no actual cash changed hands, but the dividend represented capital appreciation) was unconstitutional.  This ruling would certainly apply to any tax on unrealized capital gains, and would be invoked by those affected.  Will the Supreme Court succumb to more modern interpretations of the law, and revise its century-old ruling?  Who knows?

Whatever happens, expect tax-and-spend politicians to try to get their hands on every cent of our money that they can wring out of us, by fair means or foul.

Peter

11 comments

  1. I can see a team of beurocrats going through zillow and demanding assessments from counties.

    It would kill home values and a lot of people will rip out finished basements, etc. to keep the value down. This will destroy much of the economy, and our culture. Why invest in a properly if you will be punished for it. It would stop gentrification cold.

    This will really effect boomers who bought homes before the 70s and 80s and have seen a doubling or more of home values.

  2. It's conceivable the real target here is the 401k accounts. It's hard to find out what the nominal value of all of the retirement accounts in America adds up, but the last one I can find is $28.7 trillion and that's over a year old. I'd guess the inflation we're in has increased that.

    The government can't stand the idea that someone might not be dependent on them for everything. Combine that with Warren's childish view of "rich people" as Scrooge McDuck or Smaug the dragon swimming in a pile of gold coins, and you get ideas like this.

  3. It's far worse than just going after retirement money. There have been rumors for decades that the government would renege on its promises on when it will tax retirement money.

    It will mean getting taxed on your property gains, whether or not you ever actually have gains. Values of property rise and fall over time. Do you want to be taxed every time it rises, whether or not you sell then?

    This flies in the face of the basic tax concept of realization. Something doesn't become income unless it is realized. Meaning it isn't just a temporary paper gain. The entire "open transaction" doctrine depends on it. As does the treatment for installment sales.

    This proposal is stupidity on steroids. These people should be horsewipped in public for even suggesting it.

  4. I tried to explain this endgame to Mrs. Freeholder. All I got were rolled eyes. Unfortunately, there are a lot of folks just like her in this respect. They refuse to see what's in front of their faces because to see it means they have to deal with it, and [whine]It's hard![/whine]. And if this passes, they are all going to be sitting there in the street among their belongings (if they're lucky) wondering WTF just happened?

  5. Assuming zero increase in actual value, if we are seeing a 10% inflation rate right now then your property would be worth 10% more fiat cash than it was before. Zero more value, just 10% more dollars.

    On a $250k home, that's 25k worth of "gains" and if taxed at the capital gains rate of 15% that is $3750 worth of inflation tax because you own a home.

    God forbid your property actually increased in value in addition to that.

    Sorry, can't fix the roof. Home is borderline condemned with the old roof and worth another $60k with the new roof. Pay 20k for a roof and another $7500 worth of taxes.

  6. Consult with an accountant but you might be able to form a company and "sell" the house to that company. Then you could "rent" the house back from that company and maybe beat the bastards at their own game. Unlikely but you never know.

  7. When is the rule of law going to be enforced?

    Yellen needs to be reminded who her bosses really are. as well as the resident at 1600 Pennsylvania avenue.

  8. Back in ~2000, CA added a 10% surcharge onto their highest tax rate to anyone making $1m/year. 18k people! IIRC, ~8k of them instantly bailed out of the state, taking businesses and their spending money with them. CA claimed they "broke even". Yeah, right.

    A couple years ago, they finally added to that grab, with an additional 3% tax. (they kept trying this all along) About 1k instantly bailed, again. IIRC, the total of those who got nailed was lower than what was left after the last grab, so those with that much income have been leaving CA, obviously expecting the state to continue stealing from the people who have the money to invest in new businesses, buy property, or simply spend it.

  9. Bullets. Politicians' faces. Assembly required.

    Like a moth to the flame, this appears to be exactly what they want, and indeed, long for: Their Ceauçescu Moment.

    One of these days, three lemons is going to spin up on their slot machines, and then it's a party.

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