Commentary by Mario H. Lopez originally published at RealClearPolitics.com
As Washington Democrats seek ways to pay for massive current and future government spending, they continue to rely on the false promise of not increasing taxes on ordinary Americans. The supposed targets are always billionaires, Wall Street, or more broadly, “the rich.” Recent proposals from progressive politicians use the generic term “wealth tax” to drive their point.
Progressives may believe that cloaking tax schemes in the language of envy may help sell their proposals, but anyone who scratches just a bit beyond the surface sees that the rationale falls apart.
One mechanism for fueling “wealth taxes” is that the government should tax the “unrealized gains” of peoples’ assets. They key here is “unrealized,” about which there are two critical dimensions to note. First, the value of an asset cannot be accurately assessed until there is a real transaction. Anything prior to that is a mere projected value — what someone thinks will end up being the actual value. Second, if the projected value of an asset — your home, for example, rises 20%, it does not mean you magically have more money in the bank. That gain exists only on paper — that is, it is unrealized. The value of assets only becomes real once they are sold — when the gain is realized.
The same goes for stocks, which data shows are owned by more than half of all Americans, with 80 million to 100 million of us owning 401(k) saving and investing plans.
But yet, some politicians want to tax those “gains” as if they were real. A wealth tax regime would force people to pay taxes regardless. So if the projected value of your home rises, you would be taxed on that perceived rise, even as your income remains the same, or possibly goes down.
Wealth taxes would force people who own certain assets like stocks and other similar assets to sell them just to pay the taxes. That reduces people’s nest eggs — money that they plan to use for retirement or for a rainy day. And for the assets that remain, retirees would see their investment plans go down in value as stocks and other assets are devalued through forced sales.
And the economic impact will be exponentially worse given the effect on small businesses. Everyone, from the struggling sole proprietorship fighting to survive in the era of COVID-19 to mom-and-pop retailers, will find themselves in the IRS’s crosshairs.
The role of small businesses is especially key in underserved communities. Hispanic Americans, for example, start small businesses at a rate three times that of the general population and have seen some positive growth, especially pre-pandemic, despite facing unique challenges that include access to capital.
These businesses are key to wealth and job creation, especially in the communities where they are located. But small businesses are assets, after all, meaning that they will become easy prey for bureaucrats eager to fulfill their mission of lining government coffers to pay for the overspending that politicians demand.
As the value of the small business rises — again, on paper — owners would be forced to find ways to pay for these new, punitive taxes, undoubtedly leading to significant job losses.
But even workers who don’t lose their jobs will feel the impact directly. The American Action Forum analyzed so-called wealth taxes from two of their leading champions, Sens. Elizabeth Warren and Bernie Sanders. The analysis found workers would be hit with $1.2 trillion in lost earnings over the first 10 years of the Warren wealth tax. Over that same time span, Bernie Sanders’ version would cost workers $1.6 trillion in lost earnings. AAF shows that workers would essentially pay “an effective tax of 63 cents on workers for every dollar the government raises in revenue from the wealthy.”
In their zeal to go after “the rich,” progressives in Congress apparently don’t mind hurting average Americans and making their pursuit of the American dream even more difficult.
Mario H. Lopez is the president of the Hispanic Leadership Fund, a public policy advocacy organization that promotes liberty, opportunity, and prosperity for all Americans.