I’m trying to figure out if I’ve ever heard as much nonsense in such a short time as I’m hearing now about the Biden-Harris plan to tax unrealized capital gains.
According to the plan, a increase in the value of an asset would be taxed as incomeeven if the owner has not sold the asset. Currently, these so-called paper profits are not taxed.
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It doesn’t matter that this proposal is nothing new – and is still a long way from becoming law anyway.
Or that it would only apply to the small number of people with a net worth over $100 million.
Or that it would be created to solve a very specific problem, namely that many super-rich actually pay no income tax at all.
Even putting all that aside, almost everything I hear against the proposal is wrong and an insult to our intelligence.
I’m not even particularly liberal. I am a registered independent, investor and capitalist. But these arguments are so bad that I feel like raising the hammer and sickle start singing the ‘International’. Low-tax conservatives and Republicans should be ashamed of themselves.
Let’s start with all the arguments against this policy that are just arguments against taxes in general – for example, that if we tax unrealized profits it means that people are punished for owning property or saving money.
This measure punishes me because I work for a living, because I have to pay income tax. I am also penalized for owning a home because it is subject to property taxes. I am being punished for inheriting money if I have to pay inheritance tax. I get punished for shopping when I pay my state’s sales tax.
What’s left? Um… nothing.
Look, I get it. These people don’t like paying taxes. Nobody does that. But the government money has to come from somewhere. If I want to live in an untaxed anarchy with no government, I can probably move to one of the world’s failed states and take my chances.
These people are no different than left-wing extremists who also want something for nothing. They deserve each other.
Then there are the complaints that taxing unrealized gains is somehow unfair because the investment has not yet been sold, or because it would be logistically too difficult to tax them before a sale.
Phoey.
Why should I sell something before it is taxable? My city taxes my house every year at its assessed value. I don’t feel obligated to wait for me to sell it.
My mutual funds and exchange traded funds charge me a fee based on the total value of my investment. They don’t just bill me for the money I sold. I pay a percentage of the total value, including all unrealized profits.
If you have a financial advisor or portfolio manager, they will do the same.
They don’t charge you based on realized profits. They will charge you a fee based on total assets.
Amazing actually, since such a calculation would be completely impossible.
I have never heard anyone argue that this is unfair or the wrong way to do business.
Previously, taxing unrealized capital gains would likely have been logistically impossible. Imagine all the paperwork, in the days before computers.
Not anymore.
I bet your broker is tracking your total portfolio value by day, hour and minute, even if you’re just a regular with an online account. It is now easy to calculate this.
My favorite complaint about taxing paper profits comes from those involved in the hedge fund and private equity fraud whose companies would be most affected. These are people who make billions by charging their clients high fees…on their total assets under management.
No, not just the realized profits, but also all unrealized profits.
The typical manager charges clients about 2% per year on the value of their investments, just to breathe, plus 20% of profits (if applicable). It is – commonly – known as the 2-and-20 model.
None of these ridiculous fees are only levied on realized assets. Give $1 million to a hedge fund or private equity fund and they start charging 2%, or $20,000, per year from day 1 – often before they get around to investing your money.
And if your portfolio somehow goes up by, say, 50%, they’ll take another 20% off that – $100,000 – in additional fees. No, they won’t wait for these gains to be realized, or “crystallized,” or whatever term they use. You pay these costs quarterly, if not monthly, as the assumed performance occurs.
Then, if investments decline, even before you realize a cent of personal profit, do you think they will give that money back? How tall are you?
And these are the same people who pretend to be shocked – shocked! – by the very idea of levying a tax based on the value of assets or unrealized profits: “What kind of Soviet tyranny is this?”
Pass the tissues.
It’s not like these guys have any reason to complain about the tax code. They already receive a complete massage from the tax authorities every year.
Hedge fund and private equity managers are taking advantage of the so-called carried interest loophole, which is better described as the tax break for two Ferraris.
This is a special tax benefit just for them, that’s so scandalous that non-experts simply refuse to believe it when you tell them about it.
It means they pay taxes at special low rates. And they can defer their tax bills for years.
Try doing that at home.
It’s not even that they create value. As Warren Buffett has noted, over time these funds will… generate worse returns for their investors than low-cost index funds.
Personally, I think we should impose a special tax on all hedge fund and private equity managers. What about 2% of their personal assets per year, plus 20% of your profits – realized and unrealized?
Excessive? Larcene? Grotesque? Certainly. We have learned from the best.