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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.
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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