"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. constitution.  It 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