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Theory — the new unrealized capital gain tax is designed (or will have the effect of) forcing people like Elon Musk to surrender control of corporations resulting in PMC control instead of founder control.
As some detail, there is a proposed 25% tax on unrealized gains for the super wealthy coupled with a 44% tax on realized gains. So let’s say you own 10b of a 100b company. If you do nothing you will owe 2.5b of tax. But if you sell 2.5b, you’d actually owe more! So you end up having to sell a pretty big chunk of your stake. This means that before companies get really large founders have to sell a big chunk of their equity preventing super wealth. It also changes incentive structures for founders making them more likely to cash out.
Once they cash out, PMC will take control. PMC coexists with modern democratic policy. Therefore, the democrat tax proposals help ensure corporations are run by allies.
This 'idea' has zero percent chance of ever happening. And it's not because of rich people lobbying.
It's because it would catastrophically destroy all markets (public and private) overnight.
This is because the price of anything is different at different times and, before an actual transaction occurs, is only an approximate representation of what a theoretical buy and seller would agree on. There are plenty of reasons zero buyers and zero sellers would want to proceed with any transaction at a given time.
Example A would be startups. Startups raise cash from investors to get off the ground, develop products, market and sell them, enter new markets, acquire other companies etc. Their "valuation" at any given time is largely a projection of possible future revenue and/or a future reasonable acquisition price. It is not, in anyway, a guarantee of a spot cash price for equity. I think Anduril, the cool new defense technology company, has something like a $15bn valuation after its last funding round. To make the math easy, let's say there are 100,000,000 shares outstanding all with equal seniority etc. (this is a toy example. The realities are always more complex, which factors in later). Is anyone going to pay anyone else the $150 / share in the secondaries market for Anduril? Fuck no. There are maybe some early investors who got in at $10 (or less!) who may want to sell at $50 or something to lock in gains, but the biggest holders (including insiders) are holding out for an IPO or acquisition.
These are multi-year equity holders. What does their tax situation look like? Are they taxed every year based on new VC funding and the follow on valuations of the company? If that's the case, they would end up paying more in taxes than they invested in the company while being unable to liquidate their holdings in a thinly traded private market. Investing in a start up would become financially impossible. Perhaps evening just starting one on your own. What happens then? Only incumbent, large, highly traded public companies can be invested in - but you still have to pay tax on your not-cash winnings. Very quickly, there are only a few nationalized companies doing any business t all. Retail investors mostly hold cash which inflates away to nothing and there is zero new capital formation and investment. That's stagnancy and inflation - aka stagflation - and is the very model for how to kill a country and, very likely, pave the wave for a populist demagogue to seize power.
Taxing unrealized capital gains is literally taxing a business for existing and operating as normal, but with some sort of arbitrary number thrown on top of it as "valuation." If that number is wrong, which it will be sooner or later, you divide the business by zero and it not only ceases to be viable, it implodes overnight.
Much like price controls, this is an "idea" that reveals profound economic and financial illiteracy. It is 100% vibes based in a Robin Hood aesthetic and is designed with all the depth of most sloganeering. It should be viewed for what it is, a very public display of a lack of interest in developing meaningful policy in any direction.
So what you're saying is that they're stupid enough to come up with the idea and to campaign on it.
I don't quite think that precludes them from being stupid enough to enact it as well.
Sure Kamala would need a cooperative Senate, but she's also been campaigning on ending the filibuster. I seem to recall SCOTUS said somewhere that taxes on unrealized gains are wealth taxes and therefore don't qualify for 16a. But Supreme Court "reform" has also shown its head.
It's probably not gonna happen. But Trump's tariffs were also probably not gonna happen.
SCOTUS was expected to say as much in Moore v. United States this year. They avoided doing so outright (though the concurrence and dissent, between them four members of the court, did), but were warning enough that I can't see Kavanaugh and Roberts allowing it.
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She would need and mindlessly obedient Senate. Chuck Schumer is often called "Wall Street's Senator." He wouldn't support this. If the Senate Majority / Minority leader won't support a bill from their own President, that's a big ugly mark in the press. It happens, but rarely. If they won't agree, the bill won't be introduced in order to avoid that public cat fight.
Even if you don't have Schumer around, there are enough concious-of-economics democrats who wouldn't support this. The Washington Post, of all newspapers, came out strongly against Harris' food price controls the day after they were announced. Apparently Obama's speech sounded like Ezra Klein economics. Right now, the Democrats are aligned behind Orange Man Bad, but, beneath that, there are some MAJOR basic economic policy clashes between the progressives (Harris, The Squad etc.) and the Liberal core of the party. This is what would preclude them (the Harris admin) from enacting these policies.
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I have altered the deal. Pray that I do not alter it further.
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I'm still curious how this is supposed to work for early investors in startups that don't succeed, but post impressive numbers. Say I'm a founder (I'm not) with no other major assets and for one year my share of my startup gets valued at $200M, which triggers this unrealized gains tax. Even if I get this "illiquid" status, I'm going to be assessed a 25% ($50M) tax bill. It's not uncommon for startups, even hugely publicized "unicorns" to fail completely. If the company is forced into a down round next year, and my share drops to $50M, where do I get the funding to pay my tax bill? Is the government going to take my entire stake? What if the company folds and I end up with nothing: do I still owe $50M? Is that a thirteenth amendment violation?
If the answer is "yes" here, I really can't let my assets be illiquid and volatile, lest I find myself unable to pay the tax man at some later date. It's also potentially concerning that triggering Mugabe-esque hyperinflation suddenly becomes a positive (real) revenue stream for the government when every asset is worth $200M or more and gets a 25% annual wealth tax.
And it probably pushes investors into infrequently-valued investments: buy a one-of-a-kind Renaisance masterwork, and how does the government handle that valuation? Supposedly my jurisdiction assesses my real estate property values annually, but I can tell you I've seen pretty substantial divergence between actual sale prices and assessed values over the last few years.
Due to tax treatment of certain types of options, there were a number of early failed-startup employees in the dot-crom crash who were left in insurmountable debt by tax bills for gains they never actually received (the options vested in the money, which was a taxable event, but the value of the stock cratered before they were allowed to sell it). I believe their options were 10 years of debt slavery to pay as much as they could (living on what the IRS would allow them), or suicide (since bankruptcy does not relieve you of tax debt). Since they were not sympathetic to the media, no one cared; the same will go for early investors who end up in the same sort of hole.
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How would this be applied to family offices and blind trusts, among other arrangements?
Plus
Would mean you actually create a weird third order tax arbitrage effect. If I think the market is going to go down, I'll pay all up front, if I think it will go up, I'd pay over time but also probably end up paying some level of double-captial-gains taxes. I don't know how this actually reverberates throughout the system but a pretty obvious effect would be people selling if they sense a recession coming for tax reasons whereas a lot of those folks would, today, just hold their assets through the recession. This is how you get a Depression.
Wait what? I pay a deferral charge on my unrealized gains when I realize the gain? Well, at what point do I determine the strike price of the unrealized gain? This is actually the zainest part because they're surfing back over into the realized gains line.
It isn't about operations, it's about investing over 5 - 10 year time horizons.
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Kinda reminds me how banks are forced to report transactions in excess of $10,000.
Probably at the time people said "it's no big deal, imagine taking 10 thousand dollars out at one time". Now, 55 years later, $10,000 is not all that much money.
The fact that this the $100 million is not indexed to inflation is a huge red flag. Like the income tax, this tax on the "super rich" will quickly be levied on the much less wealthy. Note also that capital gains are not indexed to inflation. So if the value of the dollar declines by 50%, which it will, your investment has doubled in price and you have to pay tax on your "gains".
This will inevitably lead to regular people having to catalog their wealth so the taxman can take his share. Everything always moves in the direction of more taxation and more government interference in the lives of regular people. It almost never gets rolled back.
This proposal is awful in every way except that it's unlikely to pass.
Not necessarily. At that time, people did a lot more big transactions in cash, so it was actually more common to withdraw a big chunk of cash. They even issued $10,000 bills to make it easier.
They actually discontinued those at nearly the same time, leaving $100 the maximum currency where it has remained since.
Also worth pointing out that $100 today is worth only 1/8th as much as it was in 1970.
Cash is being phased out so the government can monitor all financial activity. Let's not give them the power to monitor and scrutinize all your assets as well.
Did you mean this the other way around? Yes.
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You convincingly establish that the policy is really, spectacularly dumb.
You don't establish how it being really, spectacularly dumb would prevent it from happening.
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