How can leftists regulate the stock market if they don’t even understand how it works?

2021-10-28 08:46:00

There are two types of Democrats: those who know how to leverage their positions to make millions in the stock market, and those who have no idea how the stock market even works.

The latter group of lawmakers put their ignorance on display this week when they proposed a new tax on unrealized capital gains. Essentially, it would be a way to tax the rich based on their net worth rather than their annual income.

There’s just one problem: The capital gains Democrats want to take for themselves don’t even exist yet. They’re just investments, which means they are subject to the whims of the stock market. They could increase one day and decrease the next. To nail down an exact amount to tax fairly would be impossible — to do so based on a single day’s valuation in December would be silly and arbitrary.

Here’s an example. Rep. Pramila Jayapal cited a surge in billionaire Elon Musk’s personal fortune, which jumped by $36 billion on Monday after Hertz Global Holdings placed an order for 100,000 Teslas. Because he “made $36 billion in one day,” surely he can “afford to pay [his] fair share,” she said.

But that’s not how this works. Musk can’t just go to a bank and ask to withdraw the $36 billion he “made” this week, because he didn’t actually “make” that money. That $36 billion is not a liquid asset, it’s just an unrealized market gain. He could lose all of it tomorrow, and more, if the Hertz deal falls through and investors lose confidence in Tesla.

If Musk’s shares do suffer such a loss, he would have one of two options under Democrats’ proposal: He could subtract those losses from his gains and only be taxed on what’s left, or he could carry those losses forward to offset future gains. This might look good on paper, but in reality, it would still be a mess — in large part because the value of an asset is subjective until an actual price is paid for it.

If Musk has to sell shares of Tesla in order to pay this new tax, that will change his percentage ownership and affect decision-making at Tesla. If he sells other assets to pay the tax on his not-actual-gains from Tesla stock, then he might have to liquidate “non-tradeable” assets, such as private companies that employ people (and, most dear to the hearts of Democrats, keep them paying taxes).

Even if Democrats figured out how to fairly balance capital gains and losses in a market that fluctuates daily, this tax would still be bad economics. The U.S. would see reduced investment across the board as wealthy Americans justifiably took their money elsewhere. They would probably take their companies and the thousands of jobs, too. You don’t want to be living in a country that treats success like it’s a crime and feels entitled to reach into your wallet before even you do.

Congressional leftists such as Jayapal don’t understand investments, earnings, or basic economics. They shouldn’t be talking about any of this at all, let alone writing laws that would upend the entire financial system.

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