We have referenced Byrne Hobart’s The Diff newsletter any number of times as well worth reading. He thinks and writes as well as anything I have come across in the great cesspool of output that curses our world.
Or maybe I just don’t get out that much. Regardless, this clip highlights an interesting thought that harkens from an old saw that taxation and regulation are merely playgrounds for the rich and their lawyers. Translation: There will be more private companies being valued at phony marks in order to avoid taxes. Genius. And Byrne, a tax on unrealized gains might not be the end of the world…but it’s a good start.
This is hard to hide. But capital appreciation, particularly for private assets, is something that’s possible to hide. Look at a list of the biggest one-year gainers or losers in public equity markets, and you’ll see a list of companies where there’s a wide range of possible valuations that could be ascribed to them. Tax authorities will, of course, want to debate this, and on the other side of the table there will be people paid an order of magnitude more to minimize the stated value of some assets. A tax on unrealized gains creates an incentive to privatize companies with a broad range of possible values, and to hire better tax lawyers to handle the debate over what those values are. (So professional or amateur stockpickers should be particularly incensed—it’s basically an incentive to take all the fun stocks private!)
A tax on unrealized gains isn’t the end of the world. Every tax policy has some suboptimal features, and it’s hard for a tax to drive you into penury if paying it is conditioned on having more money than you could reasonably spend in a lifetime. But part of what it illustrates is that the rich really are different, and their income and wealth means something different than middle-class income and wealth do. When they get richer, they do a little bit of competition with the rest of the economy over the allocation of scarce goods and services, but the vast majority of the competition they do is with other rich people instead. If you’re worried about consumption inequality, you can take comfort in the fact that higher wealth inequality makes high deficit spending more sustainable.
*On a complete side note to the issue at hand, Corporate profits and capital gains aren’t nearly as big a potential revenue source (total corporate profits in 2022 were $2.9tr, while wages were $10.5tr). Capital gains are also a potential revenue source, but even at their peak they’re a smaller share of GDP than corporate profits, and they’re far more volatile, and some of the time, the big spikes occur in anticipation of a change in how those gains will be taxed. Ask Gavin Newsom.
