Wednesday Morning Rant

A few months ago, there was coverage of a plan kicking around the IRS to tax money that doesn't exist - that is, a plan to tax unrealized gains. Gains that aren't realized (made real) don't actually exist, but the IRS wants to tax their hypothetical value. There is one case wending its way through the court system now, as JJ mentioned in yesterday's Morning Report.

This is absurd on its face. Unrealized gains are not gains. They might push up your net worth, but unrealized gains are not money. You can't eat your real estate appreciation. You can't eat your stock price increase. In order to do so, you have to liquidate the asset - sell it, or borrow against it. Both come with tax consequences and other costs. Realizing your paper gains isn't free.

For the sake of argument, set aside that an "unrealized gains tax" is a wealth tax by another name, is wrong, is illegal (not that legality matters), is a gross overreach, creates a dual penalty for inflation and is impossible. None of that matters. If they want it, they'll get it. The consequences of such a scheme will be extremely corrosive in many ways. First is the problem of paying the tax. Since you won't be able to pay your unrealized gain tax with unrealized gains, that leaves you two choices for payment: pay with money you do have, or turn some of your assets into cash.

The word for the latter is "sell." To raise money to pay the tax, assets will need to be sold. This has the strong chance of forcing asset values to decline. This creates an interesting trap. The government policy forces asset sales, which reduces asset prices, which reduces the unrealized gains tax - but not to zero. So the next round of forced asset sales might be smaller, but it will still be there and the cycle continues. This will take time to unfold. People will likely prefer assets to cash and most will probably choose to spend money that's losing value quickly before selling an asset that might be losing slowly or even gaining - especially if the asset is real estate. But some people will have to or choose to sell. This will continue and amplify over time, but may be a manageable decline.

This behavior will also, as mentioned before, reduce the value of the wealth unrealized gains tax by depressing asset prices. This is a stupid scheme that, at best, can work only on a short to intermediate timeline before asset prices are turfed and the tax basis declines. It will also have extremely nasty consequences on the financial system. This is a game with a fairly predictable end that will never raise the amounts that our Party masters envision. So why do it?

I think the answer to that is the secondary effect of such a scheme: expropriation with reduced compensation. This new tax (I assume it will sail through the courts), will enable vast concentration of assets in the hands of extremely wealthy people and corporations, and the government. As asset sales are forced so that the putative "owners" can pay the tax, those assets will be gobbled up - at depressed prices - by those with easy access to money. That is, by the plutocrats and connected foundations, businesses, government directly, etc.

If you were looking to achieve a massive concentration of assets under the control of very wealthy people and organizations that have easy access to money - almost all of whom just so happen to be good Party men - this would be a pretty good way to realize that outcome.

posted by Joe Mannix at 11:00 AM

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