The tax on unrealized capital gains

Marginal Revolution ^ | October 25, 2021 | Tyler Cowen

[karpov]

Maybe I don’t understand how the supposed plan is supposed to work. There is no tax credit for unrealized capital losses, right? So you won’t want to hold volatile asset classes any more, right? Imagine the value going up, you pay some tax, and then the value falls and you move into loss territory. You still paid the tax! You get nothing back. By exactly how much do the prices of these assets have to fall, ex ante, so that holding them is a good idea in the first place? Or maybe the wealthy investors subject to this tax are not significant enough to on their own move market prices, in which cases they are just pushed out of these very risk asset classes?

If you can deduct unrealized losses, just how much revenue will the bill raise? Might the wealthy be incentized to hold ever yet riskier assets in that case? And how will debt assets be treated? What exactly is equity anyway? Do all options and derivatives positions have to be considered as well? (If not there is a massive arbitrage opportunity, hold some assets with a big chance to take losses but hedge your position with derivatives.)

Has anyone estimated all this and figured it out? Should we pass such a tax bill without such estimates and public debate? Isn’t that kind of democracy “good”? What would The Party of Science say?

What am I missing here?

[Vermont Lt]

I think you stated it perfectly.

Where you and I differ is that this law only applies to people making 100,000,000 annually. So the incremental tax rate would not change.

I agree that this is a stupid—and probably unconstitutional—”law.” I don’t think it would last 90 days before an injunction.

Wealth taxes are pretty stupid once you get past the “lets eat the rich” BS.

[kosciusko51]

And the original income tax was only to be on the top few percent.

If this gets implemented, it will trickle down to lower income levels in a few years.

[Vermont Lt]

I agree.

Very little in the tax code or budgets are every changed. Especially when they don’t work.

I always thought that they should write into every law what they were “expecting.” When I would promote capital spending at my job, I was always expected to define success—and it ALWAYs came up during my budget reviews.

It made us brutal when we would make cuts. If the plan did not work—gut it and start over. And everyone knew whether it was “working” or not.