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  • Writer's pictureIshfaaq Peerally

Effects of a Wealth Tax on the Stock Market

US Secretary of the Treasury Janet Yellen proposed a tax on unrealized capital gains on billionaires. She did not want to call it a wealth tax but House Speaker Nancy Pelosi did. How will a Wealth Tax affect the stock market? $SPX500

The wealth tax is a direct response to the rising wealth gap in the US along with rising government expenses. Joe Biden initially wanted to raise corporate taxes but some of his own party members such as Senator Kyrsten Synema would not for it. But she's agreeable to a wealth tax. The proposed wealth tax is expected to generate around $200-$250 billion in revenues, which is not much compared to current government expenditures.

How will it work? They are going to tax unrealized capital gains. For example, I own shares of Apple $AAPL since 2016, and normally, I would not be expected to pay taxes unless I sell. If I sell after 20 years, I pay taxes after 20 years. But this new tax law would mean you will have to pay taxes even on unrealized profits. For instance, Elon Musk will have to pay taxes on the $120 Billion he made this year on paper although he did not sell his shares of Tesla $TSLA . Unrealized capital gains are not real income and might be Unconstitutional.

If implemented, the tax will only affect the 700 billionaires. It is not clear how it will work. Only stocks will be taxed? What about jewelry? Art? Private companies? Those will be difficult to value and also less liquid. Will a billionaire have to sell 2% of his yacht to pay a tax? If only stocks are going to be taxed, then investors would prefer alternative investments.

In the beginning, the effects on the stock market might be limited as $250 billion over a $50 Trillion stock market is nothing. But eventually, the government might decide to tax everybody. When the Federal Income Tax was implemented in 1913, the highest tax rate was 7% and only people making over $3000 ($80K) today were paying taxes. Nowadays, everybody pays taxes. The same thing may happen to the wealth tax and eventually, stocks might not look like an attractive investment over the very long-term.

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