Instead of taxing unrealized gains, which forces asset sales and creates economic distortions, a more sensible approach is to tax the cash that wealthy individuals borrow against their assets. This targets actual liquidity and avoids punishing the long-term investment that builds the economy.
Related Insights
The idea that a billionaire can "spend" their net worth is flawed. Their wealth is primarily in company stock; liquidating it would crash the price and signal a lack of confidence. This misunderstanding of wealth versus income fuels unrealistic proposals for solving global problems.
Congressman Ro Khanna proposes a tax on the total net worth of individuals with over $100 million. Unlike an income or capital gains tax, this targets unrealized wealth, forcing the liquidation of assets like stocks to generate the cash needed to pay the tax.
The wealthiest individuals don't have traditional paychecks. Instead, they hold appreciating assets like stock and take out loans against that wealth to fund their lifestyles. This avoids triggering capital gains or income taxes, a key reason proponents are pushing for a direct wealth tax in California to address this loophole.
Ben Horowitz warns against wealth taxes on unrealized gains by citing Norway's experience. The policy required founders to pay taxes on their private company's rising valuation with illiquid stock, leading to an exodus of entrepreneurs and effectively dismantling the local tech ecosystem.
The proposed tax on billionaires' assets isn't about the billionaires themselves, who hold a fraction of national wealth. The real goal is to establish the legal precedent for a private property tax. Once normalized, this mechanism can be extended to the middle class, where the vast majority of assets reside.
Unlike uniform property or income taxes, a wealth tax targeting a specific group (e.g., billionaires) is a non-uniform "demographic tax." This sets a precedent allowing government to seize any post-tax private property from any defined group, effectively making all private property public.
Unlike a capital gains tax which is paid upon sale, Switzerland's wealth tax is levied annually regardless of performance. This prevents timing tax payments and its compounding effect can become more costly for long-term investors than a one-time capital gains tax.
Instead of selling assets and triggering capital gains, the wealthy buy and hold assets like stocks. They then borrow against that portfolio tax-free for living expenses. When they die, a life insurance policy pays off the loan, allowing the original assets to pass to heirs tax-free.
Billionaire wealth taxes are easily dodged by relocating. A more robust policy would tax capital gains based on the jurisdiction where the value was created, preventing billionaires from moving to a zero-tax state just before selling stock to avoid taxes.
Proponents often describe wealth taxes as a "one-time" event to make them more palatable to voters. However, the true aim is not the initial revenue but establishing a permanent legal precedent for the government to seize private property. The "one-time" language is a deliberate misdirection to cross a legal and political Rubicon.