Oh my little cupcake,
Where are your sprinkles?
– Fuddy Duddy, by Fishwife
Land of the Free Stuff
Vice President Kamala Harris supports the nearly $5 trillion in tax increases included in President Biden’s 2025 budget proposal. The proposal is close to 200 pages and includes an extensive list of tax hikes.
Notable increases include a 28 percent federal corporate tax rate and 44.6 percent top capital gains and dividend tax rate. Currently, the U.S. federal corporate tax rate is 21 percent, while the top capital gains and dividend tax rate is 20 percent.
These tax increases, when combined with state taxes, would give the United States the highest total tax rate on corporate income in the developed world. That’s a remarkable distinction for a country that has long proclaimed to be the land of the free.
These days, after a century of public education, many Americans confuse freedom with free stuff. They believe that freedom means getting free stuff from the government. And they vote accordingly.
Greedy corporations are a favored target of liberal politicians. Sticking it to big business is a proven tactic for getting votes.
But as with any tax increase, it is workers who end up bearing the costs. Increases in the corporate income tax translate to lower wages and fewer job opportunities. Thus, the total economic costs of Harris’ proposed tax hikes will be many times larger than the tax revenue it generates.
Still, for Harris this simple reality doesn’t matter. Wealth redistribution and big government corruption are two of the fundamental canons of progressive socialism. She intends to pursue these means even if it hurts the people she purports to help.
Taxing Phantom Profits
At this point, it is exceedingly clear that the United States government doesn’t have a revenue problem; it has a spending problem. For the fiscal year 2024, which ends on September 30, the U.S. Treasury is on target to collect close to $4.8 trillion. However, it is also on target to spend $6.7 trillion.
The $1.9 trillion difference – the deficit – is made up with debt. This deficit spending has several consequences. It further propels the consumer price inflation of goods and services. It also gets racked and stacked on top of the national debt tab – currently over $35.2 trillion – and must be financed and paid by future generations.
This mega debt burden ensures slower rates of economic growth in the future, as revenue will be claimed by spending from the past. Thus, there will be little left-over capital to invest and fuel future growth.
Over many decades, Washington has shown itself to be politically incapable of getting a grip on its spending problem. The more that is taxed. The more that is spent. There is never enough. Consequently, the politicians dream up ever more disgraceful ways to tax the citizens.
One of the novel proposals being carried forward by Harris is a wealth tax on unrealized capital gains. The plan includes a new minimum tax of 25 percent on traditional income and unrealized capital gains for taxpayers with more than $100 million in total wealth.
This proposal amounts to taxing phantom profits. All it takes is a simple grasp of economics to understand that there should be nothing to tax until a financial asset is sold for a profit.
Fool Me Once
Unrealized capital gains means that the asset has not been sold; the profits have not been booked for the benefit of the asset-holder. The idea that this should be taxed is absurd.
Moreover, markets go both up and down. So, unrealized capital gains can also become unrealized capital losses. Paying taxes on something that may disappear is ridiculous.
Would the Treasury then cut a check when the unrealized capital gains you paid taxes on turn to unrealized capital losses?
But not to worry. This only applies to people with more than $100 million in total wealth.
Do you have more than $100 million in total wealth? Neither do we. So why care about an unrealized capital gains tax?
First, there’s the moral aspect. Taxing a person’s property is theft. This form of “wealth tax” amounts to government confiscation of private property.
Second, this $100 million threshold can and will be reduced. If this tax goes forward, before long, Washington will be taxing the unrealized capital gains in 401(k) accounts. How do we know?
The U.S. government’s track record has proven this. Congress has demonstrated that once it has its hooks into a new revenue source it will demand more and more. Wealth taxes always become middle- and working-class taxes.
For example, when the 16th Amendment to the U.S. Constitution was ratified in 1913 (the same year as the passage of the Federal Reserve Act), the federal income tax generally applied to the ultra-wealthy.
In 1913, the top tax bracket was 7 percent on all income over $500,000 – or about $11 million in today’s dollars. The lowest tax bracket in 1913 was 1 percent – practically nothing.
What happened?
Harris Wants Your Retirement Account
The government can always come up with reasons to increase taxes. War is one of the better covers for tax hikes.
To finance America’s chosen participation in WWI, Congress passed the 1916 Revenue Act, and then the War Revenue Act of 1917. With the stroke of a pen, the highest income tax rate jumped from 15 percent in 1916 to 67 percent in 1917. It then jumped to 77 percent in 1918.
Following the war, the tax rate dropped to 25 percent – still well above the original 7 percent. But that was short-lived. Congress raised taxes again in 1932 during the Great Depression from 25 percent to 63 percent on top earners.
This fluctuated throughout the 20th century and on to today. Though it never returned anywhere close to the initial 7 percent.
Today the top income tax rate is 37 percent. And when you add in the 3.8 percent tax added by the Patient Protection and Affordable Care Act, the maximum federal income tax rate is 40.8 percent.
However, top earners are not the only ones seeing their incomes confiscated by Washington.
According to the US Bureau of Labor Statistics (BLS), American workers made a median wage of $1,139 per week in the first quarter of 2024. This sums up to $59,228 per year, which puts the median wage earner squarely within the 22 percent tax bracket.
Moreover, those living within one of the 43 states that levy individual income tax also pay the state on top of the fed. Then there’s social security and Medicare taxes, which are in addition to income taxes. There’s also property tax and sales tax and gas tax, and countless fees and exactions that are paid as part of daily life.
These taxes are all piled on the shoulders of American wage earners. Did the architects of the income tax in 1913 intend for this “wealth tax” to burden average Americans?
We don’t know. But it happened all the same. And it will happen with unrealized capital gains taxes too.
You see, an unrealized capital gains tax may start with the ultra-wealth. But soon enough, Washington will exact its pound of flesh from the unrealized capital gains in average American worker retirement accounts.
The money you’ve been diligently contributing for decades will be long gone before you hit your golden years.
Remember this when you’re told the unrealized capital gains tax only impacts the ultra-wealthy. Several generations ago, average American workers were fed this same line of bull when the federal income tax was rolled out.
We’ve been paying the price ever since.
[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth. And right now, at this very moment, I’m preparing to make a contrary decision once again. >> And I’d like to show you how you can too.]
Sincerely,
MN Gordon
for Economic Prism
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