In politics you always have to watch the other hand. Like a good magician, the astute politician shows you want he wants you to see in one hand while he is doing the important stuff with the other. It is a trick, an optical illusion utilizing showmanship and dexterity. Politicians do this all the time. The best recent example was the “Patriot” Act. In the name of keeping us “safe”, the Feds created an enormous new law enforcement department, a Cabinet level agency, that currently has around a quarter million employees. Most of what they are doing has little to do with keeping us “safe”, after all groping old White women before they get on a plane isn’t stopping a single terrorist.
More Sleight Of Hand
We are about to get a new one with this proposed idiocy:
Senate Democrats plan to reveal a revenue scheme for their multi-trillion-dollar budget bill that would tax unrealized capital gains, a move targeted towards the richest of the ultra-wealthy.
The measure would put taxes on unrealized capital gains, but would start at an extremely high threshold. To meet the threshold, an individual would need to make $1 billion or more in income in one year, or $100 million or more for three consecutive years. Only around 700 Americans would be subject to this new tax.
The goal behind the move is to target the wealthiest Americans, whose wealth is primarily in stocks. If a stock owner does not sell their shares of a stock, any profit made is “unrealized” and is exempt from taxation until the stocks are sold. This would change that, allowing unrealized capital gains to count as income, thus making them subject to taxation.
Well what is wrong with that? Billionaires should pay more in taxes, that is what we are always told. This seems like a no-brainer.
The problems are manifold. First, stock prices fluctuate wildly from day to day, you might have a capital gain one day and a loss the next. Stocks split and pay dividends and that muddles the value. When do you value this? Holding a stock isn’t “wealth” as such, it is an ownership stake until you sell it.
Second, the 700 people this would impact aren’t dumb and they absolutely own the political class so you can be sure that they are not going to permit anything that jeopardizes their wealth.
Third, and this is the big one. The point here is that they are targeting assets that they haven’t been able to tax yet. Janet Yellen said as much in a quote from the article, emphasis mine:
“I wouldn’t call that a wealth tax, but it would help get at capital gains, which are an extraordinarily large part of the incomes of the wealthiest individuals and right now escape taxation until they’re realized,” Yellen said.
That last part is the main point. “Escape taxation”. What else “escapes taxation”?
IRAs and 401(k)s.
By some estimates 401(k) plans have roughly $7 trillion in assets, all sheltered from being taxable until the year the funds are withdrawn. Tack on another $10 trillion or so in Individual Retirement Accounts (IRA) and you are talking a huge amount of untaxed “money”. What is worse in their eyes, you can eschew the current year tax benefit of contributing to an IRA/401(k) by using the Roth provision and then your earnings are never taxed.
I think those accounts, held by virtually every American worker, are the real target here.
For many years I worked in the retirement plan industry and for much of that time Democrats were greedily eyeing these retirement plans like Joe Biden eyes little girls with fragrant hair. The idea of regular people getting the same sort of tax shelters that the wealthy enjoy is infuriating to the political class. Shifting the investment paradigm so that instead of taxing investment gains when you realize them, in other words cash out the investment, now the mindset is to tax your wealth before you can even taste it.
The way tax deferred retirement accounts work is that your investments are able to grow tax deferred for your working life, maximizing your returns rather than paying taxes on your investments every year which saps your earnings. If you lose 10% of your earnings each year instead of having those earnings compound for future years is like trying to sail a ship with the anchor down. That is precisely why a regular bank savings account is awful for retirement savings. Having a bunch of money in a savings account is just a great way to feed the Federal government as you are taxed on your earnings every year.
While most people are not contributing enough to their retirement accounts to meet the unrealistic goals, a lot of people are and it is generally (for most people) the very best way to save for retirement. Being financially independent in retirement is bad because then you aren’t reliant on Daddy Government for money. We can’t have that.
Look for an attempt in the near future to expand this tax on unrealized capital gains into retirement plans for ordinary working Americans. As far as they are concerned, nothing you have is off limits and the big prize is your retirement plan.
All the more reason to figure out an alternative retirement strategy. Are you sensing a theme here?