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  • June 21, 2021
  • Chuck Osborne

These Are Taxing Times

According to all the experts, the United States has become a deeply divided nation. Perhaps I’m just a romantic but I believe the divides are not nearly as great as they seem. I say that in part because of you. We have been blessed to have a wonderful and very diverse set of clients with very different life experiences and perspectives. 

I recently had a wonderful conversation with one of those clients. He told me that he loved reading my Perspectives. He went on to explain that he usually disagrees with me, but he loved getting a glimpse of how I think. What I appreciated most about that conversation was the fact that two adults are able to disagree and still work together, and more than that, be friends. 

I am often accused of having very strong opinions, which I actually find humorous. While I will concede that I am often perceived that way, the truth is my opinions change often. I am extremely open to being persuaded. Most of the time when I get this feedback it is due to a symptom of our modern dialog, where opinions and facts get confused. I hold on loosely to my opinions but I do insist on being factual, and nine times out of ten when someone tells me they agree or disagree with me, it is after I have stated a fact, not an opinion. We have grown accustomed to accepting or dismissing facts based on our perspectives. 

One of the greatest compliments I ever received came from a co-worker and friend. He met my father at my wedding and told him that I was the most honest person he had ever met. I attribute that in part to going to a school with an honor code, where lying would get you expelled. The other part came from my father, who repeatedly told me that, “The truth hurts.” It would usually come after someone had said something mean that hurt my feelings and be accompanied by “only,” as in, “It only hurts if it’s true. Is it?” Most of the time it wasn’t, and he would utter the old adage, “Sticks and stones can break my bones, but words will never hurt me.” If it was true, then maybe I had work to do. 

When I was young my honesty was often too blunt. I needed to learn that given the choice of being right and being kind, I should choose kind. One can be loyal to facts without being rude. I sincerely try to do that and hope I am successful. 

In the last few Perspectives I have been bluntly honest about the current state of our nation’s universities, which have been taken over by the post-modernist idea that facts don’t really exist. That is neither an opinion or a perspective, it is simply a fact. It is my opinion and perspective that this is extremely dangerous and is a root cause of our seeming division, which brings us back to our theme for this year: If you care about people, then you have to care about the results of policies. This requires an acceptance of facts, even if we don’t like them. 

Both political parties have abused the economic realities of taxation. I wrote about this in a 2010 issue of The Quarterly Report, “A Taxing Debate,” which I encourage you to read. The Biden administration has proposed raising the capital gains tax to more than 40 percent. They have also proposed taxing unrealized gains. 

The first question we get is, what impact will this have on the stock market? The answer is, not much in the long term. The news of it will likely scare people, but the reality of the market is that the vast majority of stocks are bought and sold inside tax shelters. That is simply a fact; the market is dominated by institutional endowments, foundations, and retirement plans. Even individual accounts are largely in retirement vehicles that do not pay capital gains tax. 

For those who are subject to capital gains tax, it is largely a voluntary tax. It occurs only when one decides to sell an asset and actually pocket the money.  If the government makes the cost of doing so outrageous, then history tells us people simply won’t do it. Tax revenues from capital gains will decrease. This isn’t an opinion, it is an empirical fact; which is why they now propose taxing unrealized gains. 

That thought is frightening. For most people, their largest asset is their home. So, what happens when one’s home is appraised for twice what she paid for it? Under the current rules, nothing, because this isn’t income. The house being worth more does not put money in her pocket. However, if we now must pay up to 40 percent tax on that unrealized gain, where is that money actually going to come from? Most people don’t have it. 

The examples used by the proponents of such policy are people like Jeff Bezos, CEO of Amazon, but the Bezoses of the world are what statisticians call outliers. The fact is, all tax increases ultimately hit the middle class, because the Jeff Bezoses of the world have teams of lawyers and accountants playing the game. History tells us the rich find loopholes or pay for them in the form of political contributions. Tax increases like these ultimately hit the middle class because it is only the middle class that has the combination of enough money to tax but not enough to play the game and avoid taxation. That is a fact, whether one wants it to be or not. 

We can have different perspectives on what the tax system should look like. However, we need to accept the facts of what history tells us works versus what doesn’t work. Raising the capital gains tax is one of the least effective ways to raise revenue, and changing the rules to include unrealized gains is going to cause a great deal of unintended pain to middle class Americans. 

Regardless of party or perspective, we should all agree that the tax system’s goal is to fund the government in the fairest and most efficient way possible. We may differ on what the government should or shouldn’t do, and therefore how much funding is required, but the actual collection of taxes should be based on what is fair and effective. Fairness may be in the eye of the beholder, but effectiveness is a cold hard fact. Raising the capital gains tax is not effective, and that is not my perspective, it is simply a fact. 

Warm regards,

Chuck Osborne, CFA 
Managing Director