The idea has politicians unversed in the realities of tax theory and market economics (as well as recent history) licking their lips in anticipation of a gigantic tax windfall that will fund a colossal federal budget. A little common sense would go a long way in getting them to understand the sheer insanity of the concept.
First, let’s go over some basic tax theory. Numero Uno on the list is that you can’t tax something that doesn’t exist or over which you have no jurisdiction, any more than you can eat food that isn’t there, or be alive after you’re dead (except in Chicago on voting day). Thus, in the latter case, the United States federal government cannot tax a Frenchman living in France who earns income exclusively from French sources. If it tried to do so, it might cause a slight diplomatic tiff with the French government, among other things.
|Adam Smith: principles of taxation|
Neither can the Commonwealth of Virginia tax someone in the State of California whose income derives exclusively from sources in Colorado. No jurisdiction, hence, no claim. California and Colorado have jurisdiction and probably some kind of tax treaty, but Virgina has nothing to do with it.
Neither can any government tax anyone who doesn’t have something and who didn’t do anything. One of Adam Smith’s principles of taxation is that taxes should be levied on those who can actually pay the tax, and another is that the tax should make sense, that is, be understood by those who are being taxed. What is the justification for being taxed on something that doesn’t even exist?
If someone pays $1 for a share of stock on January 1, 2022, and it has a market value of $100 on December 31, 2022, how much income will the shareholder get? The answer? Zero. Zip. Zilch. Nada.
ONLY if the shareholder sells the share on December 31, 2022 for $100 will he or she realize income (a “short term capital gain”) of $99. That can (and should) be taxed, not the unrealized “paper gain” if he or she does NOT sell the share. There is no realized income until and unless the share of stock is sold, and you cannot legitimately tax that which does not exist.
|Yeah. That's gonna work real good.|
Let’s assume, however, that Congress completely loses its collective mind and enacts the Billionaire Tax, effective for tax year 2022, with the proposed rate of 28% imposed only on billionaires . . . which might not sit well with them. We’ll further assume that the moment the tax was enacted, all the billionaires did not immediately shift all their wealth into foreign tax havens. (Believe it or not, the United States is one of the few countries in which the superrich typically do NOT hide their wealth in foreign tax havens! It puts them at the mercy of their own lawyers and accountants, who would then take over their lives — and they know it . . . but enact something like the Billionaire Tax and that would change in the blink of an eye.)
We will further assume that the rate of growth in the wealth of the superrich remains constant. In 2020, their wealth grew more than $1 trillion, pretty much all of which consisted of capital gains. We’ll be conservative and say it was an even $1 trillion for 2022, on which $280 billion is due as of December 31, 2022, payable on or before April 15, 2023. That means that $280 billion worth of stock is going to be dumped in the space of three and a half months.
Now consider the fact that the average daily trading value on the New York Stock Exchange was $169 billion in 2013, and it’s been increasing since. To be able to pay the Billionaire Tax, the superrich would have to liquidate $280 billion, that is, dump more than a quarter of a trillion dollars’ worth of shares in the space of three and a half months.
Consistent with the laws of supply and demand, share values will start to go down. As the superrich dump their shares — and having to increase the amount as the value declines — other shareholders will start dumping their shares to lock in whatever gains they have before the bottom drops out of the market.
This will also trigger dumping in foreign stock markets. The U.S. stock market is the biggest in the world, and what happens in New York typically happens in other world markets.
What we would see is a financial panic the likes of which would make the 1929 Crash look like a slight dip in the market. At the same time, it is highly probable that the U.S. Dollar, which still functions as a global reserve currency based on the strength of the U.S. economy, would become worthless.
|So why do it in a way that generates more tax breaks for them?|
Then, of course, there is the question of who would buy the shares being dumped. The government? With what? Other investors? They’re in the same boat. How about China? Probably, although Russia may nip in and pick up a few bargains.
The bottom line is that the superrich — along with a lot of other people — would suffer gigantic losses in an effort to pay the Billionaire Tax, and the U.S. economy would go terminal.
What if it doesn’t? What if the economy manages to stagger on? What happens in 2023?
For one thing, the taxes paid on unrealized capital gains for 2022 would have to be refunded in light of the realized capital losses of 2023. There is also the small matter of additional realized capital losses that could be used to offset other income. The Billionaire Tax could easily result in the superrich never paying any taxes for the rest of their lives due to the tax credits they would accumulate for capital losses engineered by Congress adopting the Billionaire Tax. Assuming the economy survived, of course.
Fortunately, there is a better way out of the current economic and financial malaise, which we will look at tomorrow.