A major flaw in the unrealized gains tax is that it punishes all investors for the actions of a few. A more targeted and less destructive approach would be to tax the loans that wealthy individuals take out against their stock portfolios, targeting the actual cash they use without harming the underlying assets.
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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.
Simply engineering high nominal growth while suppressing interest rates only inflates asset prices, worsening inequality. A successful, sustainable deleveraging, as described by Ray Dalio, must also include active redistribution through higher taxes on top earners and corporations to rebalance the economy.
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.
Collectors buy art, have it appraised at a much higher value, and then borrow against that new value. Since loans are not considered income, this provides them with millions in tax-free cash for other investments, all without selling the underlying asset.
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.
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.
A tax on unrealized gains is fundamentally flawed because it requires payment on potential, not actual, money. To pay the tax, investors must liquidate parts of their holdings, like company shares, which can destroy the asset's long-term value and disincentivize investment and company growth.
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.
