Bidenomics 101: Taxing Money You Haven’t Yet Made

President Joe Biden and the Democrats are desperate to fund their $2 trillion spending package, a reduction from the original $3.5 trillion submission. However, the White House has ostensibly conceded that it still cannot generate enough revenue to cover the cost by coming up with an innovative levy for the financial markets: taxing money Americans have yet to earn on Wall Street. Washington politicians could certainly star in a 21st-century update of Joy of Painting with how creative they are at confiscating your earnings – and money you have yet to make.

A Wealth Tax on Unrealized Gains

In the stock market, an unrealized gain is an appreciation in the value of an investment that the trader possesses but has yet to hit the "sell" button to realize the profits. Many investors, especially among those who took advantage of the coronavirus-induced market meltdown in the early days of the pandemic, are sitting on these unrealized gains, anticipating even bigger returns from their holdings in FAANGs, BANGs, and memes. Once these shares are sold, the gains are taxed by the government.

The new administration has a different idea as part of efforts to fund its ultra-aggressive progressive initiatives. Instead of waiting until shareholders find buyers for their stocks, Treasury Secretary Janet Yellen believes the taxman is entitled to this money before the shares are even liquidated. So, for example, if Acme International stock starts the year at $10 and soars to $60 per share at the end of the year, and investors have yet to sell, the Internal Revenue Service (IRS) would get a portion of that $50-a-share capital gain.

Democrats contend that this Build Back Better annual tax on liquid assets held by billionaires would only impact fewer than 1,000 of the country's wealthiest citizens. Yellen, the former head of the Federal Reserve, who only disagrees with the description of this financial penalty and initially submitted the policy recommendation in February, recently told CNN:

"I wouldn't call that a wealth tax, but it would help get at capital gains, which are an extraordinarily large part of the incomes of the wealthiest individuals and right now escape taxation until they're realized, and often they're unrealized in the death benefit from a so-called step up of basis."

Is this the panacea for Biden’s trillions in new outlays? Financial experts are already ringing alarm bells.

Goodbye, Mr. Capital

For anyone possessing a modicum of common sense, the first thing that springs to mind is this will lead to a decrease in U.S. investment. Wealthy investors would likely want to minimize their tax bill by looking outside the United States for investment opportunities, whether it is in emerging markets or advanced economies. Capital outflows would accelerate to Brazil, Russia, India, and China (BRICs).

The federal government has a long history of broadening its tax obligations after placing a bullseye on a small number of Americans. In 1913, when Washington introduced its 1% and 6% income tax rates, it impacted only 3% of the population. Fast forward to the present – any citizen earning anything will be slapped with a 10% levy – at the minimum. So, why would U.S. officials stop at penalizing billionaires, particularly if the plan does not add as much to the coffers as initially predicted? Washington would merely shift its targets to millionaires and then households making six figures.

Quicker than Biden could say “trunalimunumaprzure,” lawmakers could start pickpocketing Robinhooders – the men in trading tights – when the budget deficit swells.

Reports of the concept are already noting that Senator Ron Wyden (D-OR) is considering a "change to U.S. tax law that would redefine taxable income for a few hundred people," noted The Wall Street Journal. Indeed, Americans may not need to wait decades for a bigger pool of taxed citizens.

Meanwhile, what if investors face unrealized losses? Will Uncle Sam cover a portion of the red ink? During the 2008-2009 financial crisis, it was claimed that the government was socializing losses and privatizing gains. Today, it could be a reversal: The government is socializing gains and potentially privatizing losses

Desperate Times Call for Desperate Measures?

Be it an income or wealth tax, Biden and his merry band of Democrats are anxious that they will fall short of their revenue estimates. But does this anxiety warrant stretching the definition of income and wealth because they need the cash to distort the economy further and follow through on their progressive boondoggles? Indeed, their revenue streams are clogging up, forcing the administration to become more creative in its pursuit to extract money from the successful. The president endorses the socialist dogma of equalizing misery, ensuring that investors that made the right investment decisions or the companies that satisfied customers will pay for the sin of prosperity.

~ Read more from Andrew Moran.