Few figures in conservativism are more revered than Thomas Sowell. A free-market economist, social theorist and philosopher, Sowell’s work has spanned decades and influenced generations.
Sowell wrote a nationally syndicated column, authored dozens of books and dazzled television audiences time and time again with his common sense, anti-intellectual approach to political and cultural issues.
The following story is part of The Western Journal’s exclusive series “The Sowell Digest.” Each issue breaks down and summarizes Sowell’s influential works, applying them to current-day events.
It’s one of the cornerstones of Vice President Kamala Harris’ plan to pay for her promised largesse. It’s overwhelmingly rejected by Americans when they’re asked about it. And, decades ago, economist Thomas Sowell warned us about the dangers of the policy.
During the Democratic National Convention last month, Harris said that she backed President Joe Biden’s recent budget proposal, which includes a bevy of new taxes — including a proposed 25 percent minimum tax on those with over $100 million in accumulated wealth and capital gains taxes on unrealized gains.
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Now, as The Wall Street Journal noted, these might just be wishlist items that go nowhere legislatively: “Getting those tax increases through a divided or GOP Congress would be impossible and it would be difficult even if Democrats are in control,” reported Andrew Restuccia and Richard Rubin.
However, as CEO/CIO of U.S. Global Investors, Frank Holmes, noted in an April piece for Forbes, this “would increase the top marginal rate on long-term gains and dividends to a jaw-dropping 44.6%, marking the highest such rate in U.S. history.”
“The idea of taxing unrealized capital gains—increases in the value of an asset like property or stocks that haven’t been sold yet—is not only unprecedented but fundamentally flawed,” he wrote.
“Imagine purchasing shares in a company for $1 million, and next year, those shares appreciate to $1.5 million. Under Biden’s plan, you would owe taxes on this $500,000 gain, despite not having sold the shares or realized any actual profit.”
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That’s how Biden’s tax plan would work — if, of course, he manages to get it through Congress. And while he doesn’t seem to have the votes, a President Harris might be able to push it through.
In 2012, Sowell wrote — using the simple metaphor of writing a book — of the folly of treating capital gains like ordinary income when it comes to tax policy.
“Ordinary income is usually guaranteed. If you work a certain amount of time, you are legally entitled to the pay that you were offered when you took the job,” Sowell wrote in a column aimed at then-Obama administration saber-rattling regarding capital gains tax hikes.
“Capital gains involve risk. They are not guaranteed. You can invest your money and lose it all. Moreover, the year when you receive capital gains may not be the same as the years when they were earned,” Sowell wrote.
“Suppose I spend ten years writing a book, making not one cent from it in all that time. Then, in the tenth year, when the book is finished, I may sell it to a publisher who pays me $100,000 in advance royalties.”
Am I the same as someone who has a salary of $100,000 that year? Or am I earning $10,000 a year for ten years’ work?”
It so happens that the government will tax me the same as someone who earns $100,000 that year, because my decade of work on the book cannot be documented. But the point here is that it is really a capital gain, and it illustrates the difference between a capital gain and ordinary income.”
Furthermore, as Sowell noted, there’s risk involved. Imagine if the manuscript is rejected. It’s worthless but for the paper it’s printed on. And, as he noted, “I would not even have been among the first thousand writers who met this fate.”
Should he be taxed for the $10,000 in unrealized potential gains for the book for each of the 10 years he was writing it? Would he receive a refund if that investment didn’t pay off?
If this seems overly simplistic to you, Sowell assured readers it wasn’t.
“We pay attention to businesses after they have succeeded. But most new businesses do not succeed,” he wrote. “Even those businesses that eventually turn out to be enormously successful may go through years of losing money before they have their first year of earning a profit.”
Amazon.com spent years losing money before turning a profit for the first time in 2001. McDonald’s teetered on the edge of bankruptcy more than once in its early years. Desperate expedients were resorted to by the people who ran McDonald’s, in order to just keep their noses above the water, while hoping for better days.”
At one time, you could have bought half interest in McDonald’s for $25,000 — and there were no takers. Anyone who would have risked $25,000 at that time would be a billionaire today. But there was no guarantee at the time that they wouldn’t be just throwing 25 grand down a rat hole.”
This is why we tax capital gains differently and we don’t tax unrealized gains — because, to do so, we would paralyze the investment economy.
“If a country wants investors to invest, it cannot tax their resulting capital gains the same as the incomes of people whose incomes were guaranteed in advance when they took the job,” Sowell wrote.
His words are being echoed by those involved in the investment economy now that the Biden-Harris administration is threatening to raise money to pay for its largesse on unrealized gains.
“It would be devastating to the economy,” said Andy Puzder, former CEO of CKE Restaurants in an Aug. 22 interview on Fox Business.
“You’re going to give up revenue, you’re going to lose companies. We’re going to lose business,” he added.
“I thought when we got rid of President Biden as a candidate, when he withdrew or was driven out, I thought we’d end up with Kamala-nomics instead of Bidenomics, and it would be basically the same thing,” Pudzer noted.
“But it’s really much, much worse,” he said. “These are irrational policies that will drive us into an economic ditch.”
Former House Speaker Newt Gingrich concurred.
“You need to understand, a 25 percent increase in unrealized capital gains means, theoretically at least, if your house goes up in price, in value, the government can step in and say: give me the money,” Gingrich said.
“If you don’t have the money, the government can step in and say: give me the house.”
And while this is estimated to raise over $800 billion in revenue for the government, this is working off the assumption business will continue as normal. It likely won’t, since, as Americans for Tax Reform noted, this policy would lead to many Americans paying over half their income in taxes.
Especially hard hit, unsurprisingly, would be small business owners — not the Elon Musks or Jeff Bezoses of the world that Kamala Harris supporters probably imagine she’s targeting when they hear her rhetoric.
And make no mistake, Sowell noted in 2012: They’ll end up being losers, too.
“It is not just a question of ‘fairness’ to investors. Ultimately, it is investors who guarantee other people’s incomes in a market economy, even though the investors’ own incomes are by no means guaranteed. Reducing investors’ incentives to take risks is reducing the jobs their investments are likely to create,” he wrote.
“The biggest losers from politicians who jack up tax rates are likely to be people who are looking for jobs that will not be there, because investments will not be there to create the jobs.”
There isn’t enough money to be gleaned from this kind of taxation to make it profitable for the average American. We’re promised that this is just getting the wealthy to pay their fair share, even though we’re never quite told what that “fair share” is.
As Sowell notes, that share is a lot different than what you likely think it is when it comes to capital gains taxes. And, if unrealized capital gains are on the table, everyone will be footing the bill.
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