Inflation And The Billionaires Tax

Taxes and inflation were in the news Wednesday. Or, put differently, the same macro narratives continued to hold sway.

Three-year yields in Australia jumped as much as 24bps after CPI data showed a key price gauge leaping to the highest in seven years.

The annual trimmed mean index accelerated to 2.1% in the third quarter (figure below), as did the weighted median, another gauge that excludes large, one-off price impacts. It was the first time since September of 2015 that both measures exceeded 2%, the Australian Bureau of Statistics said.

As is the case in other locales, traders are keen to bring forward tightening. Swaps priced a trio of RBA hikes by the end of next year, in stark contrast to Philip Lowe’s timeline.

The RBA sees rates steady through 2023, a position that may not be particularly malleable, despite core inflation now exceeding the bank’s year-end forecast.

“We suspect that the RBA rhetoric will continue to dismiss the numbers as temporary,” Credit Suisse said, just ahead of Wednesday’s data. “However, we think that market expectations are likely to remain resilient.”

Last week, the RBA was compelled to flex on the April 2024 security, after yields pushed nearly 8bps above the YCC target.

Ultimately, Wednesday’s fireworks down under were just another manifestation of traders testing the waters on the notion that central banks are prepared to countenance market pricing suggestive of preemptive rate hikes for risk management purposes. The same thing played out in New Zealand and, poignantly, in the UK last week. Kiwi two-year yields jumped 14bps Wednesday, piggybacking on the CPI-inspired selloff in Aussie rates.

Meanwhile, back at the ranch, Democrats are poised to tax some folks. Rich folks. Super-rich folks.

In a move that’s sure to be challenged in court by very expensive lawyers (and challenged on paper by very expensive accountants), the new levy would apply to taxpayers whose assets total at least $1 billion or whose annual income is $100 million or more for three consecutive years.

So, in other words, not you. In fact, not anybody, really. The total number of affected taxpayers would be just 700. (And no, that’s not a typo.)

Crucially, billionaires will be forced to mark-to-market and pay taxes on any gains, irrespective of whether those gains have been booked. “Tradable assets (assets like stocks that are easily valued on an annual basis) owned by billionaires will be marked to market each year,” Senator Ron Wyden said. “This means that billionaires will pay tax on gains or take deductions for losses, whether or not they sell the asset,” he added, noting that “taxpayers would be able to carry back their losses for up to three years in certain circumstances.”

As for non-liquid assets (or non-tradable assets), the plan will impose a “deferral recapture amount,” basically a tax on top of the usual tax, which Wyden described as “akin to interest on tax deferred while the individual held that asset.”

Invariably, the plan will garner all manner of derision on finance-focused social media, despite it only being applicable to a handful of Americans. Any such complaining will be yet another manifestation of America’s “temporarily embarrassed billionaires” problem, whereby everyone views themselves as potentially wealthy, rather than permanently exploited.

No amount of evidence will every change that perception. Tens of millions of Americans indoctrinated by decades of capitalist propaganda will go to their graves poor or middle class, believing that they too would have become rich if only they’d had more time.

Wyden delivered a devastatingly succinct assessment in a statement issued early Wednesday.

“The wealthiest few who avoid taxes by indefinitely holding assets are also able to borrow against those assets to fund their lifestyles,” he said. “This means they opt out of paying taxes and instead pay only low interest rates on loans from Wall Street banks.”

Oh, and you can’t get around it by leaving, either. As Bloomberg noted, “billionaires who want to give up their US citizenship would be required to pay taxes on their entire fortunes before expatriating.”

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10 thoughts on “Inflation And The Billionaires Tax

  1. With our current makeup of judiciary I am incredibly skeptical that judges who are investing in companies they are presiding over in cases are actually going to enforce any of this. More likely, they will buy shares of Tesla and then rule the taxes on poor Elon are “unconstitutional” or some other such nonsense.

  2. Is it just me. or does this seem to be a particularly BAD time to be proposing mark-to-market tax accounting for the super rich? With financial market indices all perched at or near generational highs, and longer-term forward rates of return expected to be muted at best, it seems like such a proposal will merely translate the rich’s current long-term unrealized (and untaxed) capital gains into shorter-term realized (and fully deductible) capital losses. In other words, it will somehow make things worse in all likelihood.

    Of course, we apparently cannot rule out the market continuing to march ever higher at a 15-20% annual clip, in which case the proposal may work, at least for a minute until the loopholes are discovered, inserted or otherwise conjured.

    1. No it’s not just you…! There are a myriad of things that can go wrong in the master plan including currency debasement , prolonged Fed accommodation , high inflation, impacts of rapidly rising Global Warming , Geopolitical upheaval and on and on goes the list. The best laid plans of mice and men (you know the rest of this ). The only certainty is the Tinkerers will continue to tinker . There is a Darwinian survival of the fittest (arguable ) at play as well and that is a topic that flies in the face of Political Correctness. Tough to be optimistic on this topic.

  3. I would think the unrealized gains in years previous to the introduction of the tax would be taxed when realized in the future, while the unrealized gains in each year subsequent to the introduction of the tax would be taxed each year. That’s the only way this would make sense.

    I built a little 10 year simulation, assuming that is how the tax will work. Start at $100 portfolio value, try different scenarios for annual investment return before tax, assume portfolio liquidated at year 10, and look at the NPV of taxes collected and NPV of after tax gain versus the NPVs under the current tax system.

    The impact of the billionaires’ tax on these NPVs is variable depending on the path of market gain/loss. If market rises a constant X% per year, the NPV of taxes is not much different and the NPV of after tax gain is very roughly X% lower under the billionaires’ tax (because the investment return rate is assumed to exceed the discount rate). If market goes down then goes up to end up in the same place as in the constant X%/yr gain scenario, then both NPVs may be a little higher (in most scenarios, single digit % difference).

    The billionaires’ tax’s main impact, it seems to me, is to pull tax revenue forward.

    Of course, if the portfolios are never liquidated the result is different. But no-one lives forever. Estate and trust taxes eventually kick in. Billionaires can use charitable donations and foundations to evade those, but those can provide societal benefit.

    1. It doesn’t matter what their public policy positions are; their actual positions are already paid for and locked in. It is all a shell game, the cast of “Rotating Villains” as Glenn Greenwald stated when he was sane. A Senator or two is the front facing opponent of some progressive legislation, and then they propose something else with 0% chance of passing but gets the ire of two other Corporate Democrats like a Tester or a Coons who will express concerns about it to take the heat, who then propose some other pie in the sky legislation that a Mark Warner or a Carper have reservations about and on and on until nothing gets done and the Republicans get the majority. Then Democrats can blame them instead of a rando Parliamentarian, the Supreme Court, a memo, or whatever other excuse is trotted out.

  4. I guess that would only hold true if everybody affected by this tax had only bought their assets last month.
    However, at least as far as I understand it, the so far unrealized gains would be taxed.
    Given the stock markets meteoric rise in the last 1.5 years, I very much presume there are quite a lot of unrealized gains in the average billionaires portfolio.
    Especially since financial products of any type most certainly constitute the major part of these portfolios.
    So, for example, Leon Coopermans 245,705 shares of MSFT, which he most certainly has been holding for longer than 3 month, should show some handsome paper gains which would be used as basis for calculation of said tax.
    Anybody pls. correct me if I’m wrong.

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