Let’s try this explanation for why this capital gains tax affects us all, not just “the wealthy”.
I am not what anyone would call wealthy. I have a very modest amount of money invested in a brokerage account; I treat it like a savings account, but keep a certain percentage invested in various stocks. I buy low and sell high, and enjoy a certain yield (around 20% for this year). Those are realized capital gains: when I sell a stock for a profit, I have “realized” the gain. With me so far? This is the investment income that has traditionally been subject to taxes, and I’ll get a 1099-R at the end of the year showing how much tax I owe on those gains.
Now: let’s say I leave a certain amount of the account invested, buying and holding for the long term. The stock prices fluctuate, generally trending upward but sometimes dipping downward; that part of the account gains and loses value as that process plays out; the goal is to invest in stocks that appreciate in value over time. This is also a gain, but it has not been realized yet: as long as I own the stock, the amount of money I spent to buy the stock has not changed. Let’s call that the “principle”. As long as I do not sell the stock, my principle remains unchanged; there’s no actual gain in the amount of cash I have on hand. On paper it has gained value, but that’s only on paper. This is an unrealized gain, and that’s what the Democrats want to tax.
So let’s just say for argument’s sake that we’re on board with this tax; after all, my itty-bitty investment account is nowhere near this “billion-dollar” threshold that has been thrown around (it’ll be much lower, trust me). I won’t be taxed at all on unrealized gains so I’m safe, right? Wrong. And here’s why.
A stock is an ownership stake in a company, divided up as “shares”. When you buy shares of a stock, you’re buying a tiny fraction of ownership in the company. Everybody pays essentially the same prices for those shares; I buy shares for the same prices as million-dollar investors at any given moment. I just buy far fewer shares. When share prices go up, I get the same benefit as they do, just on a smaller scale. When prices go down, I get penalized the same way they do: my investment loses value just like theirs. The difference is entirely in scale. So here’s what happens when the “wealthy” get taxed on unrealized capital gains: they dump their stocks. That results in lower share prices; when a large number of shares get liquidated in a short time that means a dramatic lowering of share prices. So suddenly, my modest investment loses value rapidly. Now, I am paying a price for this tax that was not supposed to affect me at all.
Now let’s look at some other types of investments that aren’t so obvious to the average Joe: retirement and college funds. You know those IRAs, 401ks, and 529 “savings” accounts? Guess what: if you have any or all of those, stock prices affect you too: that’s how those plans grow over time. So even if you have far less than even a million dollars in those, they’re going to tank too. Now YOU’RE paying the price for this tax on the “wealthy” even though you are not directly taxed. Multiply that by several million accounts and now you begin to see the scale of the problem: it will be catastrophic. This will trigger an economic depression on a scale that the world has never seen. Even people who have no investments at all will be affected: supply chain disruptions even more acute than we already have, runaway inflation, widespread unemployment as huge companies see large percentages of their company value evaporate overnight, complete and utter economic ruin. It will touch every single one of us.
So even though this unrealized capital gains tax is supposedly targeted to the ultra-wealthy, you can clearly see that it will affect all of us. This is why this seemingly innocuous tax is the mother of all bad ideas.