There, But for the Grace of God…

Do you remember that time when you and your best friend went to Buffalo Wild Wings and you both agreed to order your wings with the Blazin’® Knockout 🌶️🌶️🌶️🌶️ hot sauce? Your friend ordered first and when it was your turn you changed your mind and ordered the mild Parmesan Garlic sauce instead? Then, when the wings arrived, you watched with a mixture of horror and hilarity as your friend suffered, all the while enjoying your delicious wings?

Well, it looks like the U.S. dodged the hot sauce bullet while our best friend is about to take their first bite.

According to MarketWatch, Kamala Harris backed a tax on unrealized capital gains. What exactly is that? The idea is to tax unrealized capital gains as income. An unrealized capital gain, also called a “paper profit,” refers to an increase in the value of an asset that a person hasn’t sold, whether it’s a share in a business, an old car you fixed up, or real estate.

For example, if you purchased a stock for $100 this year and it increased to $110 next year, you would pay a tax on the theoretical $10 capital gain. Even though you didn’t sell the stock, and you didn’t get the $10 cash, but must still pay the tax.

Proponents of this type of tax express a desire to “tax the rich,” assuming that only the rich have unrealized capital gains. They further assume that the current tax code favors the rich by not taxing these gains. Wealthy individuals can avoid taxes on capital gains forever if they don’t sell the assets and when they die, pass the assets on to heirs.

There are many criticisms of taxes on unrealized gains, painting them as “economically destructive.” When individuals know their unrealized gains will be taxed, they have less incentive to invest in productive assets such as stocks, real estate, or businesses. This leads to a misallocation of resources and slower economic growth.

I suppose that whether you think this type of tax is good or not would depend on whether you’ve studied economics and human nature. Your political philosophy surrounding wealth redistribution would enter in as a factor too.

Let me ask you a question: if you knew that you were going to be taxed on what you might earn by selling something today, even if you didn’t sell it, would you ever buy that thing to begin with? Would you buy that stock? Your house? Invest in your small business? Start a new business? Buy a treasury bond (which could have capital gains if interest rates drop)? Buy gold or silver? If you were super wealthy, would you move to another country? Hide your assets in Swiss banks and shell corporations?

Humans are mostly motivated by greed – in other words, keeping more of what’s theirs. I’m sure whatever you did would be in your own self-interest.

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Ok, so who’s our best friend who will soon be biting into a wing with the Blazin’® Knockout hot sauce?

Australia.

Starting in July, the government of Prime Minister Anthony Albanese will be instituting a tax on unrealized capital gains. While the tax proposed in the U.S. was for taxpayers with $100 million in assets, the Aussie one begins at $3 million. While even that sounds high, in the U.S. that would mean about 8 million households. Also, that $3 million is not indexed to inflation, so it will eventually sweep more taxpayers in.

Fake images generated with Grok

Oh, and Australia’s tax rate on this fictional income? 30%. Imagine if you had invested everything in a business a few years ago and the business did well. You could be facing a huge tax bill with nothing left in the bank to pay it. If you owned a stock that went up last year, you paid the tax and this year it went down, do you get a refund? There are dozens of scenarios like these that the Aussie government will have to deal with.

So, without biting into the spicy wing ourselves, we’ll be able to see how well this new tax works out. Aussies are no different than us Yanks – we all want to pay the least in taxes that the law allows and will do everything possible to minimize what we pay.

It will be interesting to see how much revenue the tax generates. Is there any effect to the overall economy? How does Australia’s GDP fare? Do high net worth individuals flee the country? Are more or less new businesses started?

Just like our best friend with heartburn, we’ll be able to sit back and ponder how we’d feel if we ate those killer wings.