The Trickle Down Effect of Biden’s Tax on Billionaires

It’s no surprise that the US government’s spending makes a drunken sailor look frugal. The US national debt is above $30 trillion, and the annual budget deficit is expected to exceed $1 trillion this fiscal year once again. Even worse, the Biden administration still wants to spend trillions more on its domestic policy proposals.

With the national debt already so large, the government has limited options for funding. Inflation is already skyrocketing, so borrowing more money and hoping the Fed will monetize it is unlikely. Instead, the Biden administration is trying to drum up more money by increasing taxes.

This time around, the administration is intending to try to soak the rich, by imposing a minimum tax of 20% on all households worth more than $100 million. Billed as a “Billionaire’s Minimum Tax,” the proposal won’t have much of an effect on raising money. In fact, it’s expected to raise only $360 billion in revenue over the next decade, about 2.8% of the total expected growth in the national debt during that period, or about 6% of what the government wants to spend just this fiscal year.

That leads some to say that this isn’t really a legislative proposal as much as it is a piece of electoral posturing before the midterm elections. But while soaking the rich may play well to much of the Democratic Party’s base, there’s one dangerous and pernicious idea in Biden’s proposal that could wreak havoc on markets and, if it spreads, eventually impact your wealth.

Soak the Rich Always Ends Up Impacting the Middle Class

It’s important to remember that most proposals to tax the rich always end up impacting the middle class eventually. For instance, a tax on telephone service that was first introduced to fund the Spanish-American War was originally intended to affect rich households who had telephones at that time. But enforcement of the tax only ended in 2006, after millions of American households had become subject to it.

Or take the case of the alternative minimum tax (AMT), a tax that was originally passed in 1969 to ensure that the wealthiest Americans paid their “fair share” of taxes. It was passed after an announcement that 155 high-income households had paid no federal income tax. Yet because the tax wasn’t indexed to inflation until 2012, it gradually ensnared more and more middle-class households.

Even today, the AMT exemption threshold is only $114,600 for a married couple filing jointly, a threshold that could ensnare millions of people. The lesson that should be learned from the AMT debacle is that anything billed as soaking the rich will eventually affect ordinary taxypayers too.

Tax on Unrealized Capital Gains

The most dangerous part of Biden’s tax proposal is his idea of taxing unrealized capital gains. It’s an idea that has been floated many times but hasn’t ever been tried. And that’s because unrealized capital gains aren’t real wealth. But the Biden administration wants to tax them as though they are.

Just imagine that you invested in a stock at $10 a share, and it’s now worth $100 a share. But every year you had to pay a 20% capital gains tax on those unrealized gains. Even if those taxes are considered pre-payments against your future capital gains liability, it’s still eating into your gains.

And what if you don’t have the money to pay those taxes on unrealized gains? You might have to sell some of your assets to pay those taxes, incurring even more taxes in the meantime and diminishing your ability to keep accumulating wealth. That is the dangerous part about this proposal, and it may be only a matter of time before it trickles down to ordinary Americans like you and me.

Financial assets only result in wealth once they’re sold. Elon Musk may be “worth” hundreds of billions of dollars, but that’s only because he owns vast quantities of stock. If those stocks were to become worthless overnight, his wealth would disappear. And if he tried to sell every penny of his stocks, the value of his holdings would decline as well, as increased sales would drive down the price of each successive share. In other words, his wealth really isn’t as large as we like to think.

The proposal to tax unrealized capital gains has many downsides. First, it could discourage investment. If the ultra-rich households who are targets of this proposal end up being subject to such taxes, it will change their investment behavior. Stocks, bonds, and other investments that are easily valued and easily taxed could find less demand for them from the ultra-rich, while assets that are more difficult to value, like real estate, or that are more easily hidden from tax authorities will become more popular.

This proposal could also cause the ultra-rich to sell their assets prematurely, dumping stocks and bonds in an attempt to get around these new taxes. That round of selling could send prices spiraling downward.

Because the rich targets of these tax proposals will change their behavior, the government in all likelihood will not be able to come up with the revenue it thinks it will. And as a result, the tax could gradually expand to encompass more and more households in an attempt to drum up more revenue. Therefore, you or your heirs may eventually become subject to this tax.

How Could This Affect You?

Any assets that the ultra-rich decide to sell in order to evade this tax could lose value as wealthy households dump their assets. That could mean that stocks and bonds not only take a short-term hit, but also suffer a long-term hit as their demand will be suppressed into the future as wealthy households avoid them.

And if you eventually fall victim to this tax, you could be negatively affected as well. It’s not hard to imagine a future President expanding this tax to ensnare more and more Americans. And since many retirees gain their income from assets that could become subject to taxes on unrealized capital gains, eventually many retirees could become subject to this tax as well.

Just imagine that you’re cruising along in retirement when all of a sudden the government decides to slap a tax on your unrealized capital gains. The assets you had accumulated and had hoped would last you through retirement are now starting to be eaten away by taxes on assets that you hadn’t planned to sell for years, and on which you were depending for retirement income.

That isn’t a far-fetched scenario, either. The federal government has a rapacious appetite, and the trajectory of federal spending could likely continue to increase significantly over the next decades. It may only be a matter of time before you and your retirement savings end up getting swept up in this process.

What Can You Do?

The ultra-rich are already going to have to start thinking about protecting their assets, but it may not be long before you’re going to have to as well. So how can you do that?

One way many people have protected their wealth over the years is by owning gold and silver. Gold and silver have helped many people protect their wealth throughout the centuries, and they will continue to do so well into the future.

While retirement assets held in an IRA or 401(k) are subject to ordinary income taxes and not capital gains taxes, the assets you hold in them could be impacted by these proposed taxes on unrealized capital gains. And if those assets lose value since they’re being dumped by the ultra-rich, it could be your future retirement income that suffers.

Thankfully there are ways to protect the value of your assets that you hold in your retirement accounts. One of those is a precious metals IRA, which allows you to own precious metals like gold and silver within an IRA retirement account.

Whether you decide to open a gold IRA or a silver IRA, your precious metals IRA can help protect your retirement savings by taking advantage of gold and silver’s ability to gain value even during times of economic distress. And you can fund your gold IRA or silver IRA by rolling over or transferring assets from your existing 401(k), 403(b), TSP, IRA, or similar retirement account tax-free.

Don’t wait until your retirement savings fall victim to some sort of tax changes to protect your hard-earned wealth. Contact the experts at Goldco today to learn more about how gold and silver can help protect your retirement.