By Zachary Halaschak, Economics Reporter
Sen. Ron Wyden’s proposal to tax the unrealized gains of billionaires would harm capital markets, lowering the number of public companies and reducing the number of people who participate in stock markets, critics say.
Wyden, a Democrat from Oregon, recently released a mark-to-market capital gains tax proposal after years of planning . The billionaire tax was floated as a way to pay for the Democratic climate and social spending plan, although it quickly was placed on the back burner after Democratic Sen. Joe Manchin of West Virginia expressed opposition.
The plan’s opponents say that it would be unworkable and would harm investment. A related fear is that by making it more difficult and costly to invest in stocks, it would dissuade people from offering stocks or buying them.
The billionaire tax could accelerate a long-term trend away from participation in stock markets. In particular, it could add to the decline of companies going public through initial public offerings, said Curtis Dubay, senior economist for the U.S. Chamber of Commerce.
That, in turn, would disadvantage ordinary people with middle-class jobs who want to make investments on the side. Such nonsophisticated, noncertified investors can’t take advantage of the same investment opportunities outside of stock markets that certified investors can, many of which are considered riskier, Dubay said.
“The fewer IPOs, the fewer public companies, the more that those who are able to tap those markets will do so, leaving the public to invest in an increasingly shrinking pool of public companies,” Dubay said.
“It’s disturbing that they would even consider a plan that would put a stake in the heart of U.S. capital markets, dwarfing whatever benefit it might provide for social programs,” wrote Hal Scott, an emeritus professor at Harvard Law School and director of the Committee on Capital Markets Regulation alongside John Gulliver, executive director of the committee, in a Wall Street Journal op-ed .
The two noted that the number of public companies has shrunk by about half over the past two decades. They argued that Wyden’s plan would put a “quick end” to the recent small increase in listings.
The Wyden proposal would cut against IPOs because it would treat stocks more harshly than other forms of investment. While billionaires would pay a 23.8% tax on unrealized gains of public stocks, they would only be subject to a 1.22% interest tax on real estate or privately held companies, and those funds wouldn’t have to be paid until assets are sold. That difference would make large investors less amenable to investing publicly, Scott and Gulliver wrote.
Gordon Gray, director of fiscal policy at the American Action Forum, said that for “sophisticated investors,” those who are accredited and can invest in more “exotic investments” that most people cannot, “you will see a bias away from the publicly traded capital markets from heavy investors like this.”
“And so, that effect will have a downward pressure on IPOs,” he told the Washington Examiner. “Directionally, the effect is to have fewer than we otherwise would because this makes them less attractive.”
Elon Musk, for example, might have chosen not to take Tesla public, despite all of the advantages that come with doing so, had the Wyden proposal been law, said David Sacco, a practitioner in residence at the University of New Haven finance department. He said that Musk would have had plenty of private funding options, which would have looked more attractive in light of the billionaire tax.
“All that does is it just deprives a wider range of investors of the opportunity” to invest with Musk’s company, Sacco told the Washington Examiner.
Public companies are also required to disclose far more information. If companies in general are discouraged from going public, Sacco said that “reduces the flow of information in the markets and makes markets less efficient.”