They reflect expected profits, which often fail to materialize, and the levy wouldn’t hit only the rich.
By Richard B. McKenzie
President Biden and Sen. Bernie Sanders attest that the share of the country’s wealth held by the very well-off is unfair and the product of a rigged economic system. They say the U.S. needs a wealth tax, starting with a levy on unrealized capital gains. These redistributionists are acting as if unrealized capital gains are stored in vaults like gold and can be collected at Congress’s will.
They don’t appreciate the ephemeral nature of stocks. A stock portfolio of $100 million is best approximated by the present discounted value of its firms’ future profit streams. Redistributionists point to wealthy people’s portfolio gains, which they call unrealized and untaxed income. But current income and capital gains are conceptually different. Firms’ future profits, the estimates of which cause portfolios to rise or fall in value, haven’t yet been realized. A tax on unrealized capital gains thus amounts to a tax on unrealized future profits that in many cases will never be realized, except at losses—especially if added taxation increases the likelihood of unrealized profits.
Current profits are only one factor investors use to appraise a company’s value. Investor expectations of future profitability often count for far more. How much more depends on the intangible: investors’ evaluations of interacting future market forces, including hunches and speculations based partially on others’ speculations. An investor’s unrealized capital gains can also be inflated by the eager bids of overly optimistic buyers, which could make a wealth tax a tax on phantom gains.
Wealth, subject to taxation, is fraught with risk because profit streams unfold differently as a result of ever-changing market, social, geopolitical and atmospheric forces over which the companies have no influence. Bank stockholders recently rediscovered the risks embedded in presumed safe investments that result from untethered fiscal and monetary forces. Did Messrs. Biden and Sanders anticipate how their policies charted a path to higher interest rates, leading to capital losses in bank holdings of federal securities? I think not.
