Democrats are considering a tax on unrealized capital gains to help finance their multitrillion-dollar spending plan.
An unrealized capital gain occurs when an investment increases in value but one chooses to hold it rather than actually sell it. Democrats want anyone worth more than $1 billion or who makes more than $100 million per year to pay a tax on that theoretical income. This policy proposal has drawn high-profile criticism, including some colorful pushback from SpaceX and Tesla CEO Elon Musk.
Musk rejects the idea that his private holdings should be made into a public funding farm. There’s a bit of irony in Musk complaining about Democrats’ tax proposals, seeing as he’s been one of the century’s biggest beneficiaries of leftist wealth redistribution!
Musk has always had a knack for using the government as his personal piggybank, receiving everything from electric vehicle credits to billions in space subsidies. This despite his skirmishes with regulators. The FAA investigated SpaceX after a rocket exploded last December, having been launched without a permit. Tesla is also accused of ignoring regulators and endangering drivers by allowing its experimental driverless software to be widely used on public roads. Nevertheless, when it comes to the unrealized capital gains tax, Musk is on the money.
Those in favor of these tax proposals argue that the wealthiest are avoiding taxes by unfairly hoarding wealth. This assertion, of course, is complete nonsense.
People put money into the stock market to invest in businesses with the hope of a long-term return on their investment. Until you actually sell the security, the gains aren’t taxable because potential gains aren’t income. Try buying a coffee with your “gains” from unsold Starbucks stock. You won’t get far because unrealized gains are entirely hypothetical and could always disappear from a sudden market shock.
Still, even with that delay and risk in return, holding your wealth makes sense. More CEOs are choosing to take payments in the form of stock as it can increase their long-term earnings while freeing up short-term revenue for their company. The better the CEO does, the more the stock will be worth, which benefits everyone.
The economy lifts all boats when investments stay in the stock market rather than sit in bank accounts. When CEOs maintain a significant investment in their company’s stock, they have even further incentive to perform well and at maximum efficiency. What’s shameful is describing this situation as tax avoidance. It’s anything but that.
The government rewards those who hold on to their investments long-term instead of day trading because they want investment to stay in the market, which makes the timing of this unrealized capital gains tax proposal even more baffling. The economy, after all, is still recovering from the pandemic. Democrats would essentially cause a seasonal sell-off around tax season and/or at the end of a calendar year, which would wreak havoc on the market.
It’s not popular to defend the wealthiest or their wealth. But what should concern everyone is the idea that one political party can create an entirely new concept of income out of thin air and do so in a way that will harm everyone in the long term.
Imagine if the government said it would create a new tax on the middle class by counting grocery coupons as income. Whether or not you used them, the government was going to tax you on them. How ludicrous would that be?
Elon Musk, like many billionaires, is a taxpayer subsidy abuser and has plenty of reasons to face public criticism. But that doesn’t mean we should support the government making irrational decisions that will hurt the economy. The Democrats’ unrealized capital gains tax proposal should remain just that — unrealized.
Ryan Ellis is the president of the Center for a Free Economy.
