Washington, D.C., has always served as a fountain of ideas for politicians trying to capture the national mood and use it to their immediate advantage. But the sheer number of inane ideas emanating from the Herbal Tea Party wing of the Democratic Party this year has been a spectacle to behold.
Just when one didn’t think it could get any sillier, the usually sensible Oregon senator, Ron Wyden, came out with a proposal that tops all the rest. The concept, known by some as “mark-to-market” capital gains taxation, involves levying a tax on the appreciation of individuals’ equity holdings as of December 31 of each year.
Under current law, capital gains taxes aren’t triggered until an individual sells a security or another asset, such as real estate. Wyden remarked that this allows individuals to delay and defer taxes, often until they die. At that point they can often be transferred tax-free.
Details of the proposal remain wispy at best, though Bloomberg reported structuring such a tax would be “complicated,” adding the proposal is likely to be discussed during the 2020 presidential campaign. We’ll see.
One might assume that if Wyden has any interest in applying principles of proportionality and fairness, investors would be able to mark their losses as well as their gains to market. How would that have worked in 2008, when stockholders lost an estimated $6.9 trillion and homeowners lost $3.3 trillion?
Would the government have issued $10.2 trillion in checks to these millions of individuals? That's impractical to say the lest. It would have kept the Federal Reserve and the Treasury Department very busy printing money. It probably would have stimulated the real economy and undoubtedly would have destabilized the financial markets.
One also wonders how the public might have reacted if the Treasury had issued checks for $30 billion or more to the likes of Jeff Bezos and Bill Gates. Back in late 2008 and early 2009, nearly 700,000 people a month were losing their jobs and the governmental departments that dealt with unemployment were totally overwhelmed. What would have taken priority? Getting people on unemployment assistance, bailing out banks and auto companies or cutting checks to billionaires.
Realistically, most billionaires could sustain 50 percent losses to their portfolios without receiving government checks to compensate for their losses. But lots of ultra-affluent people with illiquid assets could find themselves in a big squeeze where they might be forced to liquidate securities at firesale prices.
There are other conceivable options for mark-to-market capital gains. One would be to allow investors to use their losses to offset any future capital gains up to the amount of the loss. That is, in effect, what businesses are permitted to do with their net income. When industries like energy and banking suffer serious losses, the impact on states like Texas and New York, respectively, is severe. Even this would produce an extremely volatile stream of revenues for the federal government.
Ironically, Wyden’s proposal comes at a time when progressive-thinking capitalists like BlackRock’s Laurence Rock are urging Congress to consider extending the capital gains holding period to incentivize corporate managements to think, plan and act on a long-term basis. Whatever the effect of annualized, mark-to-market capital gains taxation would be, long-term strategic thinking is unlikely to be one of the outcomes.