Unrealized Income?

     I won’t speak for anyone else, but when I call a development “unrealized,” I know what I mean by it: it hasn’t happened yet. And of course, something that hasn’t happened might never happen. So what shall we say, Gentle Readers, about this resurrected notion of unrealized income?

     Many billionaires can pay far lower tax rates than average Americans because the federal government does not tax the increase in the value of their stock holdings until those assets are sold. Billionaires are able to borrow against their accumulated gains without triggering taxes on capital gains, enabling huge accumulations of wealth to go virtually untaxed by the federal government.

     Plainly, the Washington Post’s Jeff Stein approves of taxing that “unrealized income.” He treats it as a real thing: spendable money already in the hands of its “owner.” So why not clip off a nice chunk for the federal government, eh?

     (Remember when, during the Clinton Administration, it was proposed to tax homeowners on the “unpaid rent” they saved by owning a house? Wasn’t that clever? I wonder why Congress didn’t pass it.)

     Mind you, nowhere in this tax proposal does it say that the federal government would refund that tax bite should the value of those stock holdings subsequently decrease. Governments simply don’t do that. Frankly, it’s a miracle that the IRS still issues tax refunds to those who over-withhold. You’d think that by now they’d have changed the tax code to include a “Sorry! Your mistake!” provision that allows Washington to keep the money.

     These are the fruits of allowing a government to decide what portion of what you have is yours to keep.

     Back when the Republic was in its birth pangs, it was understood by the Founders and those closest to them that while the nascent government did need revenue, it must not be able to take whatever it wishes. After all, the Revolution was triggered by the British Parliament’s imposition of taxes on the colonies. And so the Founders made it difficult to impose direct taxes:

     The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States; [Article I, Section 8, first clause; emphasis added]

     The requirement that those things be uniform means that they must apply strictly and equally to all those persons, institutions, or activities they affect. The state governments could object Constitutionally to a tax bill that affected them non-uniformly: i.e., without regard to their populations. That made indirect taxes – taxes solely on transactions the citizen could avoid – the preferred method for raising federal revenue.

     The Sixteenth (Income Tax) Amendment removed the impediment to direct taxation:

     The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.

     That allows Congress to impose non-uniform taxes – and the income tax is decidedly non-uniform. No two persons in these United States face the same tax burden. Thus we entered the magical realm of ability to pay.

     In no other sphere of human conduct is “ability to pay” a consideration for determining the price of a good or service. Only the “goods and services” provided to us by governments are priced that way. Nor is there any objective definition of “ability to pay.” The IRS decides such things, not the taxpayer.

     Imagine if your corner grocer or pharmacist were to price your food or medicines according to your “ability to pay.” Imagine further if that gentleman were to demand that you expose the entirety of your financial affairs to him, so that he could determine what you “owe” him for you carrots or blood pressure drugs. Would you be happy with that, Gentle Reader?

     I shall twist the knife gently by asking: Does any government with the power to tax you provide you with anything that’s worth as much to you as those carrots or those drugs? Think about it

     The proposers of the “unrealized income” gambit are saying, de facto: “Of course you have the ability to pay! Just sell your stock!”

     The claim that Smith could sell his million shares of Galactic Hotcake, currently “priced” by the New York Stock Exchange at $100 per share, at will for $100 million is perhaps the most ludicrous of all Congressional fictions. Smith must find a buyer or buyers. What if there aren’t any? What if the sale of the first ten thousand shares causes the price of the stock to decline? That’s typical stock-market behavior: “Smith is dumping his shares! Sell before the run starts!” That’s usually the start of a stock collapse…sometimes a general market collapse.

     Besides, that’s not the endpoint; it’s only the beginning! Let’s imagine that Smith does succeed in selling 200,000 shares at $100, thus raising the $20 million he needs to pay the IRS. That leaves him with 800,000 shares, which will be taxed the following season. That would force him to sell another 160,000 shares to raise the payment, leaving him with 480,000 shares to be taxed the season after that. And so forth, until Smith has been mulcted of most, if not all, of his holdings.

     If you plan to tell me that pResident Biden is a “capitalist,” you’d better keep your hands where I can see them.

     Finally for this tirade, we have a hearkening back to 1913, during debate over the Sixteenth Amendment in the United States Senate:

     When the Sixteenth Amendment was being debated on the floor of the Senate, one of its opponents rose to ask the body what it could say to reassure the American public that this tax would not rise to seize some unconscionable fraction of their earnings — perhaps as much as ten percent! A pro-income-tax senator rose and replied that the country need never fear such a development: “The people would never allow it!”

     Another fine example arises from Social Security, which Franklin D. Roosevelt pitched as a “supplement” to the resources of American retirees. At its inception, Social Security promised to take no more than $7.50 per month from a worker’s paycheck. Today the limit is over $550.00 per month, and for many wage earners is the largest single tax they pay. To add insult to injury, the Supreme Court has ruled that no matter how large his payments to the Social Security system, no man has a right to any payments from it.

     Look at any of the political bonds that have been fastened upon us: labor law, environmental law, firearms control laws, laws that infringe upon property rights, what have you. In nearly every case you’ll find that the original collar was gently applied and loosely fastened. It simply didn’t stay that way.

     The term most commonly applied to such a slow, steady tightening of the screws is gradualism. Gradualism uses the power of habituation — the ordinary human tendency to accommodate and adjust to conditions we can’t individually alter — to solidify its gains and prevent retrograde motion. In her landmark book The God Of The Machine, Isabel Paterson referred to it as political power’s “ratchet action.”

     We have habituated ourselves to all manner of fetters. They were applied with such delicacy, and tightened so slowly and smoothly, that many of us cannot imagine life without them. Yet at any instant in the process, it was still possible to rear up against it. Despite appearances, it remains possible today. We simply haven’t done so, nor is it likely that we will.

     Hollow laughs are allowed, Gentle Reader. Indeed, considering what has been fastened upon us since those days of yore, they’re required for one’s mental health. And given that the $100 million “lower bound” of this “unrealized income” tax is legislative and arbitrary, what should we assume about its persistence? Isn’t it highly likely to be moved – downward — as Congress discovers new “needs?”

     That’s the way I’d bet. Moreover, the current proposal does not exempt equity holdings in 401(k) and IRA accounts. You can work out the rest for yourself.

     It has been said, mainly if not exclusively on bumper stickers, that “The Founding Fathers would be shooting by now.” Indeed! They’d be stacking bodies like cordwood. That we’ve done absolutely nothing beyond a couple of impotent protests suggests rather strongly that our will to resist governmental depredations has dropped all the way to zero. We are placidly grazing sheep, awaiting our moment to be shorn.

     Let him save himself who can.