"How To Destroy An Economy" by Kamala Harris

Dumber and Dumberer

Even though history, economics and common sense exist, presidential hopeful, Kamala Harris, has never heard of any of them. Her economic plan––which is nothing but economic illiteracy wrapped in feel-good phrases and false promises––gets worse and worse by the day. Any and every opportunity she gets to "stick it to the 1%" or to sound like a complete buffoon is readily seized upon by her and her nightmare of a running mate.

And now, in the latest entry of her ongoing series How To Destroy An Economy, she has reconfirmed that she is absolutely clueless as to how an economy grows and creates wealth.

In fact, while campaigning in New Hampshire this September she achieved the impossible: she correctly described the importance of investment for economic growth, and then proposed a tax that would reduce investment! As a California ex-pat, I promise you they make em' this way...

To paraphrase Ms. Harris: "Investment grows the economy and creates jobs. So the government should encourage investment. And to do this we should tax investment. Also, Trump raised taxes and that's bad because Trump did it. He also lowered taxes and that's bad too." So close, yet so far...

For context, the long-term capital gains tax rate is currently capped at 20%. Harris's proposal, then, would increase the rate by nearly 50% (in relative terms) in addition to another more stringent capital gains tax she's come out in support of.

The Heritage Foundation's Peter St. Onge gives a wonderful summary of Harris's tax plan in the video below. It is a 'must watch.'

With respect to Harris's capital gains tax, CNN recently reported on Harris's endorsement of President Joe Biden's so-called "Billionaire Minimum Income Tax" a couple months ago (listed under the "Taxes" dropdown) and recently published an article on the same. Biden's tax, however, is both incredibly misleading and terribly misguided. What the "Billionaire" tax really is is a tax on unrealized capital gains, gains which exist only on paper. It isn't a tax on billionaires, it's a tax on everyone because it's a tax on the future.

Unsurprisingly, Harris has jumped on the Biden bandwagon without even a moment's hesitation; never giving a thought to how a tax on capital gains might affect the economy.

If you don't know what capital gains are and are itching to understand the severity of this, here's a quick primer...

First of all, in economics "Capital" is money. So a "Capital Gain" would be an increase in money, typically money that's invested or otherwise turned into production goods. However, according to the IRS tax code, capital gains are treated more broadly than this. 

As far as Uncle Same is concerned, a capital gain is an increase in the Dollar value of a capital asset, a good used in production or which generates income. For example, most people who earn capital gains (or losses) earn them on stocks and bonds. But other things like houses, land, businesses, factory equipment and semi-trucks can also earn capital gains or suffer capital losses. Intuitively, then, a tax on any of these things would discourage their production, leading to less investment and less economic growth. Here's an example of a typical capital gain:

How Capital Gains Work

Let's say you have $100 which you use to buy stocks. You deposit your money in your investment bank (something like Vanguard or Fidelity) and you buy 1 share of Walmart's stock. You have just invested in Walmart and are now a partial owner of the company. Let's say you keep this share for a whole year and that during that time the value of your share increases to $200. Walmart is a very well-run business, and as a result, the value of the company goes up, so the value of their stock goes up.

This increase in the value of your stock from $100 to $200 is, at this point, an unrealized capital gain. It is unrealized because you don't actually have that $200 in your bank account––that's just the current value of your share. However, let's say you don't want to own the share anymore and would rather have the $200. You then sell your share and $200 is deposited in your account. But now that you've sold your share, the $200 you just acquired becomes subject to the capital gains tax. Fortunately, you don't have to pay taxes on all $200––just the $100 profit, or the gain in the value of the Walmart stock.

At a capital gains tax rate of 20%, when it comes time to pay your taxes you will have to give $20 (20% of $100) to Uncle Sam. That's it.

What are the effects of this tax? Rather obviously (the naive economist said to himself), the higher the tax rate, the lower the amount of investment. If the capital gains tax were, say, 90% we would obviously expect serious decreases in capital investment. Fewer people would put their money into things subject to the capital gains tax and would instead put it towards other things. Perhaps they spend their money on luxuries and other consumption goods, or invest it in other countries with lower capital gains taxes. The result, in any case, is that less investment would flow into American businesses. What does less investment mean?

It means that startup businesses seeking capital (money) to finance their ground-breaking innovation don't get it. It means that existing businesses like Walmart, who want to open up a new store in a "food desert", don't open them. It means that foreigners who would be willing to fund a promising business looking to hire 10,000 people in Wisconsin don't fund them. It means more consumption today, less investment in the future, fewer opportunities for employment, less economic growth, and thus a diminished capacity to produce the essential goods of tomorrow.

This is already bad enough, I think you'll agree. But now imagine that Harris taxes unrealized capital gains. The effects of this would be even more drastic than before. Under the current situation where only realized capital gains are taxed, at least the tax is on money you actually have. Not so with the "Billionaires" tax.

A tax on unrealized capital gains would mean that your 1 share of Walmart stock increasing from $100 to $200 in value is a tax you must pay even though you haven't sold the stock and received the $200! This is what people mean when they say Biden and Harris's "Billionaires" tax is a "paper gain tax." On paper you've made $100 profit, but in reality, you've spent $100 in exchange for a piece of paper (the stock) that other people say is worth $200. An article by the Tax Foundation is especially helpful in explaining just how this tax would work:

If implemented, this would seriously discourage investment. Rather than investing $100, like in our previous example, investors would have to set aside some of the capital they planned to invest in order to pay the taxes they incur while waiting for their investment to appreciate––if it appreciates at all! In which case, when investors suffer capital losses they can expect to receive nominal tax refunds in what will be depreciated Dollars. Why? Because the FED will have continued to inflate the Dollar while investors pay taxes on failed investments. This means less overall capital investment and, importantly, a change in investor behavior.

How To Kill The Entrepreneur

The role of the entrepreneur (investors are entrepreneurs too) is to disrupt the current mode of production in the economy in hopes of creating value for consumers. He does this by introducing some new product, improving on current production methods, satisfying some as-of-yet untapped demand... In general, he speculates that changing the way resources are used will be rewarded by consumers and earn him a profit.

As a matter of fact, some of the most important disruptions caused by entrepreneurs have been incredibly risky, such that a tax on capital gains––realized or unrealized––would be enough to prevent them altogether. Imagine that investors in 1995 heard of a new startup proposing to sell books on the internet. This startup is incredibly risky because it consists of a team of 5 people working out of the CEO's garage, and their biggest competitor is the multinational bookseller Barnes & Noble. If there were a tax on unrealized capital gains as Biden and Harris are proposing, investors would be discouraged from funding this little startup, choosing instead to invest their money in the tried-and-true Barnes & Noble. If that were the case, the odds that we would today enjoy the many benefits of that little startup bookstore, today known as Amazon, would be practically nil.

As the CNN article noted, the Billionaires Tax is a tax on those earning more than $100 million in annual income. Most people, therefore, likely think that this proposal only affects Billionaires. WRONG. In economics, a tax on you is always a tax on me.

In an economy, all participants depend on each other. It is a cooperative system between producers and consumers; all of whom are both producers and consumers simultaneously. Consequently, a tax on business is a tax on the worker and the consumer. Workers pay the tax on business via lower wages while consumers pay the tax on business via higher prices. But the worker, too, is a consumer as well as a producer; and the consumer, also, is a worker or business owner. No tax can affect only the group targeted by the tax. In a cooperative market system, the burden of taxation is shared by all.

Where Do You Get The Capital Investment?

For those who mistakenly believe that this Billionaires Tax would do little in the way of reducing investment and slowing economic growth, where do you suppose we get our capital? Where do the factories come from? The machines? The technological innovations? The economic growth we all enjoy?

As it happens there are numbers on these sorts of things (the bane of any ne'er-do-well's existence). In what can only be Bernie Sanders's most favorite graph, the Federal Reserve Board updates this graph (below) every quarter. And in the second quarter of 2024, it shows that the top 1% of income earners owned $37 trillion of the nation's $154 trillion of wealth, or 21%. Those in the 80-99th percentile owned the largest share of the nation's wealth, $81 trillion or 47%. Together, the top 20% of income earners own more than $118 trillion of the nation's wealth, or 68%.

Now, that's all very interesting but it's not as interesting as this next graph (below). Again, the FED collects data on income earners and reports not only their wealth but also the composition of that wealth.

The first notable thing is that the top 1% of income earners own $16 trillion worth of "corporate equities and mutual fund shares" (stocks of publicly-traded businesses) while those in the 80-99th percentile own $20.6 trillion.

In total, the top 20% of income earners own $36.8 trillion of the total $42.42 trillion worth of outstanding shares, or 86.7%.

Second, the top 20% also own more than $26 trillion worth of the nation's $48 trillion of real estate, or 56.5%.

Lastly, the top 20% also own $12.3 trillion worth of the nation's $15.5 trillion of privately owned businesses, or 79%.

Now, you could look at these numbers and decry the tremendous level of wealth inequality as Bernie Sanders often does, or you could do some really basic arithmetic and realize that since the top 1% of income earners own $16 trillion worth of this nation's publicly-traded companies that they are responsible for 38% of all public investment in those companies. Remember from the paragraph above that the top 20% of income earners own 86% of all publicly-traded companies, meaning that they are responsible for 86% of all public investment in those companies. This is not a trivial fact.

Another big picture, non-trivial fact is that the top 1% are not Scrooge McDucks hoarding piles of money in swimming pools and stuffing it inside of mattresses. The top 1% hold 43% of their wealth in the form of publicly-traded stocks and mutual funds. Another 16% of their wealth is in the form of real estate, and another 16% is in the form of privately-owned businesses. In total, more than 75% of their wealth consists of investments in production-oriented activities.

Likewise, those in the 80-99th percentile hold 25% of their wealth in the form of stocks and mutual funds, 26% in real estate and 8% in private businesses. In total, 59% of their wealth is in the form of investments in production-oriented activities. 

But if anyone was paying even the slightest bit of attention to Scrooge McDuck, they'd realize he explained these very essential and basic facts way back in 1967...

The entire video is worth watching, by the way. It is infinitely better than anything you'll here from a FED economist or college professor and has only a few Keynesian blunders (click here to watch). In any case, as Mr. McDuck explains, the rich do not become rich by sitting by idly. They must assume risk by searching for profitable opportunities with which to invest their time, money and energy.

As individuals acquire capital they invest it in themselves to increase their knowledge and skills, then they embark on some small-time venture to earn an income. If their enterprise is sustainable and yields a profit they then invest in acquiring more and better personnel, and train them on newly-acquired production equipment to increase the quality or quantity of their product. They advertise, they network, they negotiate with sellers and buyers and all the while are prodded by consumers and rivals to improve their operations. In the process of doing all this their business grows to serve more customers and to employ more and more people. They are stimulated by the potential to earn profits and deterred by the prospect of incurring losses. And those relatively few enterprises which are profitable are only profitable because they manage to improve the lives of those they serve. This is necessarily true and impossible to contradict in a free market system.

They raise the standard of living by increasing the productivity of their laborers and reducing the cost of their goods to consumers. The result of this long and arduous process is a thriving economy that enriches the investor––the capitalist––and the common man. 

This is the result in any free society which embraces free markets, and it is precisely the thing that Biden and Harris will prevent.

No Tax On Tips And No Tax On This

As I hope I've made clear, an increase in the capital gains tax would decrease investment in the U.S. economy at a time when we are already struggling to grow faster than the punitive effects of inflation. It must be understood by all that a free market is a mutually beneficial and mutually dependent system of cooperation. There are no isolated interventions which can affect one group and one group only––all of them have systemic effects.

"A tax on thee is a tax on me" must be our mantra, and any promise made by politicians to tax us into prosperity must be called out for what it is: nonsense. Sheer and utter nonsense.