What Makes America Different

In the past 15 years, the U.S. stock market is up a million percent while Europe’s is up none. A lot of people can’t figure that out. I can figure it out. Europe doesn’t have tech companies, and we do. And by extension, Europe doesn’t have a machine that cranks out venture-backed tech firms, run by crazy risk-takers, with deep, liquid capital markets for them to trade in. Europe is a fun place to visit in the summer, where you can take selfies next to the Leaning Tower of Pisa and put them on Facebook, but I wouldn’t want to start a business there.

So everyone comes to the United States to start a business. That is, of course, until we start taxing unrealized capital gains.

When most people think of unrealized capital gains, they think of a stock they haven’t sold yet. And this is how the rich stay rich, allegedly—there is no step-up in cost basis, so rich people can bequeath their appreciated stock to their heirs with no tax consequences. But an unrealized capital gains tax would affect more than shareholders—specifically, entrepreneurs.

This is how it works. You start a company, and your cost basis is effectively zero. You’re not taking a salary—you’re putting your heart and soul into the business. You live off of capital gains. So let’s say things go well and your business has a $10 million valuation, a $30 million valuation, and $100 million valuation, and you owe 25% of that. The first question that comes to mind is: how the fuck are you going to come up with the cash to pay the tax, when there is no way for you to get liquid? And the second question is, who is going to want to start a company when they are paying a 44.6% long-term rate on realized gains?

The stock market optimists are happy with the current state of affairs where the top seven stocks take up some obscene percentage of stock market capitalization. They are successful—good for them! What if they had never been founded? What if some entrepreneur somewhere was deterred by taxes on unrealized gains and outrageously high taxes on realized gains, and decided to teach social studies instead? The last thing you want to be is a rich guy who complains about taxes, but this is a very real complaint. This is a tax that is specifically designed to punish risk-takers—the people who make the economy grow. The U.S. is a fantastically rich country, and the average investor has free-rided off the gains provided by this handful of risk-taking entrepreneurs. Why would you want to mess with that?

I’ll put that question aside, for a moment, but let’s also talk about the idea that this tax is designed to only affect people with $100 million in assets, but we all know that threshold will drop over time, and I’m sure we can see some dystopian future where you buy a house for $400,000 and Zillow values it at $600,000 and Joe the Plumber owes the taxes on the difference. That is in our future, if we go down the path of taxes on unrealized gains. And the thing about taxes on unrealized gains is that you don’t get tax credits for unrealized losses—the government is not going to give you your money back.

Taxes are all about incentivizing or disincentivizing certain behavior. The fucked-up thing about our system of taxation is that it disincentivizes income, and by extension, work. If we taxed consumption, instead of income, then people would spend less, which is something I think we can all get behind. Though, we can’t introduce a consumption tax without getting rid of the income tax, because then we’ll have two taxes in parallel, and they’ll both go up over time (like Europe). So unless you repeal the 16^th Amendment, it’s a non-starter. But a tax on unrealized gains is specifically targeted at risk-taking, which is lamentable.

By the way, a tax on unrealized gains is akin in some ways to a wealth tax, and there are some countries with a wealth tax—even Switzerland, which is far from a socialist hellhole. France tried a wealth tax, yes it did. And it ended up spending more money trying to collect the tax than it actually collected in tax. When the government gets in the appraisal business, about how to value businesses and art and yachts and houses, there will be litigation, and French citizens tied them up in court for years. And that is what will happen here. So the wealth tax, as a tax, is really just a token gesture that you are doing something against inequality. But it doesn’t raise any money—it just pisses people off, and cause people to flee to friendlier jurisdictions, otherwise known as brain drain. If the U.S. won’t be the center of innovation for the world, somewhere else will, some place without taxes on risk-taking. And then, the U.S will no longer be the richest country in the world, which is not hyperbole.

This is all academic for the time being—there are few scenarios in which we don’t have divided government after the election—a Republican Senate seems likely at this point, so the issue will be punted until the midterms in 2026. And maybe by then, you will have your usual revulsion for the party in power, and Congress will be solidly Republican. But hope is not a strategy. When Kamala Harris talks about taxes on unrealized gains, 99% of the population has no idea what the fuck she is talking about. It is your job to educate people. With a tax on unrealized gains, the startup economy effectively disappears.

I mean, if you really wanted to do something about people’s ability to pass down generational wealth, just eliminate the step-up in cost basis. I don’t advocate for this, but it is better than a tax on unrealized gains. Eliminating the step-up in cost basis has its own issues—in cases where assets, financial or otherwise, have been held for 70 years, there is no record of the cost basis, so the government will assume that the cost basis is zero. So this is a bad plan, yet still better than the current plan. Nobody, outside of a few intellectuals on X, has been able to articulate a clear argument against this tax, including JD Vance, who is not a dummy—mostly because nobody wants to be seen defending the rich. I mean, who cares about centimillionaires? But this is how it starts.

I’ll add one more thing—when Kamala Harris was running for president in the last cycle, she proposed a financial transactions tax. 20 basis points for stocks, 10 basis points for bonds, and 2 basis points for the notional value of derivatives. An FTT, as it is known, is as bad or worse than a tax on unrealized gains. It will raise practically no revenue—trading volume will go down 80 percent or more. And it will vaporize liquidity—the lifeblood of the financial markets. And all liquidity is downstream from capital markets liquidity—it will affect people’s ability to get a mortgage, or a car loan, at a rate that is favorable. Politicians look at the financial markets and say, wow, what a big pot of money if we could tax all these trades. Well, again, that has been tried elsewhere in the world, and the places where it has been tried are not necessarily financial powerhouses. We do have an FTT, of sorts—we have a microscopic SEC fee. But just to run through the math means that you would pay $200 on a $100,000 stock transaction—on both legs, the buy and the sell. Yes, it would encourage people to hold stocks longer term, so they can amortize the tax, much like they would a front-end load on a mutual fund. No, I do not think this a good idea. Yes, it would hurt the high-frequency traders, but if you believe that load of shit book that was Flash Boys, then you need to be educated on equity market microstructure. Next time you log into your Robinhood app and buy a stock with a .0029 bid-offer spread, thank an HFT. Politicians like to paint an FTT as a tax on institutional investors, and yes, a mutual fund company will pay a lot of tax, but it is simply passed onto the individual investor in the form of reduced returns. The little guy gets screwed again.

The 2024 election cycle has to be the most financially illiterate election in 50 years or more. And meanwhile, the other guy running wants to control interest rates himself and apply a 10% tariff to everything. So I am not optimistic about life in general. One thing you can be sure of: the VP candidate who has never owned a stock, a bond, or a house doesn’t give a shit about people who do. I wrote in a piece long ago that I never vote, and I am keeping up the tradition this year. If Pierre Poilievre were to run for president, or maybe zombie Ronald Reagan, maybe I would.