Why 'Taxing the Rich' May Inadvertently Burden Everyone

The DNC has put forward a proposal to tax unrealized gains, specifically targeting assets valued over $100 million. This initiative is being positioned as a mechanism to generate revenue for public services and is framed to exclusively affect the nation's ultra-wealthy individuals. The underlying assumption is that such a tax can fund government programs without impacting the general population.

Unrealized gains refer to the increase in value of an asset that has not yet been sold, meaning the profit exists only on paper. For instance, if a person buys a collectible for $300 and its market value later rises to $11,000, that $10,700 difference represents an unrealized gain. This monetary value is not liquid cash until the asset is actually sold and the transaction is completed.

A substantial portion of financial assets, including stocks and cryptocurrencies, is held by individuals often referred to as 'whales.' These investors are known for buying and hoarding vast quantities of assets, accumulating wealth in the millions, or even billions, of dollars. Despite these immense market valuations, 'whales' typically lack the equivalent amount of liquid cash, as their wealth is tied up in their holdings.

If unrealized gains were taxed, 'whales' would likely sell off their assets to avoid significant tax burdens. This forced selling could lead to a massive influx of assets into the market, driving down prices dramatically. Such a market crash would not only affect the ultra-wealthy but would also decimate the portfolios of working-class individuals and smaller investors, potentially triggering a broad economic depression. The widespread drop in asset values would ensure that even those not directly targeted by the tax would suffer financial losses.

Tax incidence is an economic principle that illustrates how the actual burden of a tax does not always fall on the party that is legally required to pay it. For example, if a tax is levied on producers, they might respond by increasing the prices of their goods, effectively passing the tax burden onto consumers. This shifting of costs means that a tax often results in a net loss for other market participants, rather than solely affecting the intended target.

Taxing the rich is particularly challenging because many wealthy individuals are CEOs and business owners. These individuals hold significant control over the cash flow and financial operations within their companies. This position allows them to redistribute the costs associated with new taxes throughout their business structures.

When faced with increased tax burdens, business owners have several strategies to mitigate their financial impact, often at the expense of others. They might choose to reduce their workforce by firing employees, or they could raise the prices of their products or services, such as corn flakes, thereby passing the tax burden onto consumers. While the state can decide who is initially taxed, it cannot control these secondary economic effects, which ultimately impact employees and customers.

Politicians often use rhetoric about funding public services and providing 'free stuff' by taxing the rich, but this is presented as a form of bribery using citizens' own money. This argument suggests that it is impossible to guarantee that the economic consequences of such taxes will remain confined solely to the wealthy. The broader market dynamics inevitably lead to the burden being diffused.

The analysis suggests that focusing on economic growth is more beneficial for improving living standards than relying on wealth redistribution programs. An economy with higher growth rates can more effectively satisfy people's basic needs, such as food and housing, at a significantly lower cost. Means-tested programs, which depend on income levels, are argued to overlook the potential for widespread prosperity that robust economic growth can bring to even the poorest segments of society.

The long-term impact of Gross Domestic Product (GDP) growth rates on living standards is profound, with even small changes having significant effects over time. A 1% decrease in GDP growth, for example, could, over a period, render the United States' standard of living equivalent to that of Mexico today, referencing a post by 'kramix'. This illustrates how sustained economic growth is crucial for national prosperity, and economic freedom is strongly correlated with higher growth rates.

With reduced taxation and regulation, the private sector is empowered to concentrate its efforts on developing and producing superior goods and services. This increased efficiency and innovation ultimately lead to lower costs for the general population. Conversely, kleptocratic states, characterized by high corruption and restrictive policies, are often correlated with worse living conditions for their poorer citizens, underscoring the benefits of market freedom.

Taxation is described as an extension of the "equity fallacy," an idea positing that unequal outcomes inherently signify unfair treatment or discrimination. This perspective frames certain forms of taxation as a type of theft, particularly when enacted through democratic processes. The argument suggests that majority rule can sometimes facilitate what is termed 'theft by majority opinion,' where the collective decision to tax certain groups is based on a mistaken belief that disparities in wealth are indicative of injustice.