Taxing Unrealized Gains and the Stock Market

One of the issues facing U.S. voters when they go to the polls in early November is the future of tax policy. Technological innovations and booming stock and property markets have created incredible wealth.

Fifteen people are not worth more than $100 billion, and the number of U.S. billionaires has increased from sixty-six in 1990 to around 748 in 2023.

The former President favors lower taxes that he (and his party) believe will increase spending and economic growth through increased sales and tax revenues and higher incomes. His opponent, the current Vice President, favors increasing taxes on the wealthiest Americans, focusing on those with net worths above the $100 million level. The number of U.S. centi-millionaires has doubled since 2003 to 10,660.

Aside from increasing tax rates and eliminating deductions, the Vice President favors taxing unrealized gains for the wealthiest Americans. The Republican challenger favors lower taxes and has pledged to eliminate taxes on social security for all Americans.

The case for higher taxes

• The growing U.S. debt at over $35 trillion is a clear and present danger to the economy.
• Entitlement programs, including Social Security and Medicare, face bankruptcy over the coming years.
• The bifurcation of the world’s nuclear powers requires increased military spending.
• Proposals for more social programs need funding.

The unanticipated results

• Higher corporate and individual taxes could reduce employment and spending.
• Taxing unrealized gains on those with over $100 million in net worth could lead to stock sales, which could have a trickle-down effect and cause stocks to decline.
• A bear market in stocks will reduce the value of 401k and other retirement accounts, inhibiting the retirement potential for many individual investors.

The case for lower taxes

• Lower tax rates stimulate investment and could lead to increased employment opportunities.
• Lower taxes increase innovation as they create financial incentives.
• Lower tax rates can foster higher savings rates, leading to more investment capital and higher stock prices.

The unanticipated results

• Lower tax rates can increase the gulf between the wealthy and those with lower incomes.
• Lower tax rates without addressing government expenditures will cause the national debt to grow.
• Lowering taxes could significantly change entitlement programs, such as Social Security and Medicare, impacting the lower and middle classes.

Gridlock is the most likely outcome

• The election will put either Vice President Harris or former President Trump in the White House.
• There is no guarantee the winner will achieve a legislative majority in the House of Representatives and the Senate.
• A split in the government creates a roadblock to significant tax legislation.
• Gridlock results in the status quo, but the current tax cuts will expire at the end of 2025 and return to former levels.
• The odds in a close election favor a gridlock result.

In 1789, Benjamin Franklin, one of the U.S. Founding Fathers, said, “Nothing is certain except death and taxes.” Time will tell if the 2024 U.S. election will dramatically change the tax code or the growing debt level. In a country divided along political lines, the odds favor continued gridlock no matter who moves into 1600 Pennsylvania Avenue. Candidates make many pledges during elections to gain votes, but there is always a wide gulf between what they promise and can deliver. No matter who you support, the reality is that the U.S. debt will likely continue to grow, and tax policy will not dramatically change.

Henry Clay, the U.S. Senator and Presidential candidate in the 1800s, knew that compromise was critical in politics, earning the nickname “The Great Compromiser.” Clay knew that in any compromise both sides walk away disappointed. The odds of a tax on unrealized gains are very low, while a compromise or the status quo is far more likely, given the significant range of unanticipated ramifications and vested interests on either side of the issue.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!