If you mean the difference between the top line capital gains vs income tax rates, I generally agree but also understand the math does not.
You could reset realized long term capital gains taxes to match income tomorrow and it would not be a huge material difference in the budget. I am 100% for doing this anyways simply because it’s fucking absurd any professional W2 employee is paying more percentage in taxes vs someone who just happens to have idle cash at hand - but it’s more of a “social contract” thing for me than actual tax policy.
The issue really is tax deferral strategies and wealthy folks being able to consistently find strategies to roll over investment dollars into new investments without ever having their gains be subject to pretty much any tax. Stuff like stock buybacks, tax loss harvesting, 1031 exchanges etc.
I don’t think the “loans against a stock portfolio” tax dodge thing is nearly as large as social media decided to pretend it is - but I am very much in favor of taxing any realized value at regular capital gains rates at the time of realization. This means you will probably need to sell a bit of an asset to pay the taxes - which is the entire point.
Unrealized gains are tricky. I’ve been in a situation as a bootstrapped startup founder where I owed “phantom” tax on money I had not yet realized and ended up taking a loss on years later. Zero ability to recover those taxes paid. It put me into a hole for over half a decade. This gives huge preference to those with existing wealth and makes it even harder for someone with nothing to “come up” without handing out a majority share of their company/idea to idle capital. Especially if you’re just doing regular economy things to create a small business doing boring stuff at single digit net margins.
The common theme behind the avoidance mechanisms is "keeping the gain unrealized." Going after preferential treatment of unrealized gains categorically attacks every single one of these tricks. It nukes the hydra rather than trying to chop off heads one at a time.
I am of course deeply sympathetic to the "founder scenario," but I'd rather address it specifically than hobble tax collection generally. This could be done by a "payment in-kind" mechanism. If we wanted to steer it towards startups I'm sure the valuation rules could be set to do so, but I'd personally like to aim higher and go for progressive taxation on the basis of market cap to encourage company splitting and competition. Industries with the most dramatic returns-to-scale (semiconductors) could be exempted.
That said, the (in)ability for new founders to self-fund is deeply tied to the same gini coefficient story as the rest of the economy, so policy that addresses the gini story should help bootstrappers as well.
> Going after preferential treatment of unrealized gains categorically attacks every single one of these tricks. It nukes the hydra rather than trying to chop off heads one at a time.
Now think about how they're going to respond to it.
A major problem with taxing unrealized gains is how to measure them. For publicly traded companies that's pretty easy -- the stock is undergoing regular market transactions so you have a pretty good idea about the price. But what about assets that aren't? Closely held private companies that aren't listed on an exchange and haven't undergone any stock transactions in ten years. Art. The value -- or liability -- of a private contract for the future sale of goods at a defined price, when the market value of those goods might have since changed, or depending on what they are, be indeterminate.
It creates endless opportunities for playing games, and that complexity is exactly what allows the people who can afford fancy accountants to pay less in tax than everybody else. If you want to fix it you need to make the system simpler rather than even more complicated.
IIRC one of the Scandinavian nations has solved this with property taxes: you self-declare the value of your property, but the state has the right to buy it at that price.
That only seems like a solution until the loophole-finders get on with their jobs.
Suppose you own a company and you have a trusted friend. The company, not the owner, enters into a contract with the friend that gives them the right to buy all the company's assets for 1% of their value, if the friend can satisfy a condition that they could only satisfy with the cooperation of the existing owner. Then the owner declares that the company is only worth 2% of its ordinary value -- which might even be an overestimate given the risk that the friend could execute the contract. If the government exercises the option to buy the company, they get a company bound to an obligation to sell all its assets to the friend, and then the previous owner cooperates in satisfying the condition in exchange for the friend giving them the assets back.
"We'll ban that", you say. But then they'll be more subtle about it, and the only way to really catch them is to have a good way of determining the true value of the company, which was the original problem.
You also run into trouble with that one because people can play that game the other way. You have an asset which on paper should be worth around a million dollars, but its value has already been hollowed out or de facto assigned to someone else without actually transferring the asset. Then the owner declares that it's worth $400,000 and the government pays them $400,000 thinking they're going to make $600,000, only to find out that it's actually worthless.
You could reset realized long term capital gains taxes to match income tomorrow and it would not be a huge material difference in the budget. I am 100% for doing this anyways simply because it’s fucking absurd any professional W2 employee is paying more percentage in taxes vs someone who just happens to have idle cash at hand - but it’s more of a “social contract” thing for me than actual tax policy.
The issue really is tax deferral strategies and wealthy folks being able to consistently find strategies to roll over investment dollars into new investments without ever having their gains be subject to pretty much any tax. Stuff like stock buybacks, tax loss harvesting, 1031 exchanges etc.
I don’t think the “loans against a stock portfolio” tax dodge thing is nearly as large as social media decided to pretend it is - but I am very much in favor of taxing any realized value at regular capital gains rates at the time of realization. This means you will probably need to sell a bit of an asset to pay the taxes - which is the entire point.
Unrealized gains are tricky. I’ve been in a situation as a bootstrapped startup founder where I owed “phantom” tax on money I had not yet realized and ended up taking a loss on years later. Zero ability to recover those taxes paid. It put me into a hole for over half a decade. This gives huge preference to those with existing wealth and makes it even harder for someone with nothing to “come up” without handing out a majority share of their company/idea to idle capital. Especially if you’re just doing regular economy things to create a small business doing boring stuff at single digit net margins.