In a Nutshell

As a labor economist Janet Yellen is going to have her hands full, especially since the Biden Administration’s new $15 per hour minimum wage is likely going to slow new job creation, especially for many struggling restaurants and service industries. I should add that the U.S. federal budget deficit has now risen to over 100% of GDP, which is an ominous threshold that is only shared by Greece, Italy, and Japan, among developed nations.

At Janet Yellen’s recent confirmation hearing much time was spent on the subject of how much is too much, in terms of spending.  She apparently believes too much is better! “To avoid doing what we need to do now to address the pandemic, and the economic damage that it is causing, would likely leave us in a worse place economically, and with respect to our debt situation, than doing what’s necessary.”

Yellen laid out a vision of a more proactive Treasury that would act aggressively to reduce economic inequality, fight climate change, and counter China’s unfair trade and subsidy practices. Taxes on corporations and the wealthy will eventually need to rise to help finance President Biden’s ambitious plans for investing in infrastructure, research and development, and worker training to improve the U.S. economy’s competitiveness (she told members of the Senate Finance Committee).

Investors know this. The market knows this, and this knowledge is likely priced into the market already. What isn’t priced in is the cost of introducing new progressive tax policies. She raised the eyebrows of some Senators and some on Wall Street when she said that the Treasury would consider the possibility of taxing unrealized capital gains – through a “mark-to-market” mechanism – as well as other approaches to boost revenues.  

Wow, that radical approach would create new tax questions. Would the government provide an offset for unrealized losses?  I doubt it.  This line of thinking is “so far off the reservation” that it’s hard to imagine it even getting through Congressional committees. But desperate governments, in dire financial conditions, could do desperate or stupid things to make the numbers work.

Such “other approaches” to revenue generation are what investors need to be on high alert for before they become law. Another looming biggie would be the elimination of “step up in basis” for inherited assets. With estimates of close to $9 trillion in assets being passed on by 2030, and a projected $68 trillion being transferred in the next 30 years, taxing the gain on those transferred assets based upon original cost basis would generate trillions in tax revenue! It also would force heirs to sell family businesses and family farms for lack of liquidity to pay much higher inheritance (especially new value gain) taxes.

How about the elimination of mortgage interest deductions? Could that reduce the price of homes by about 15% to 20% overnight, while generating hundreds of billions of dollars in new tax revenues.  Don’t think it can’t happen.  It’s exactly what Canada enacted in the mid-1990’s.

Or how about taxing IRAs and other retirement plans above a certain valuation? That sacred cow might not be so sacred – not if it can be sold as “for the good of the nation.”  In 2012 the Irish government passed a law which placed a 0.6% levy on assets held in private pensions for four years.  The Irish tax on private pensions was made in response to its larger financial crisis and the need to increase government revenues.  Ireland isn’t the only country in recent history to seize portions of private investments.

Hungary, Argentina, and France have all overhauled their private and public pension plans in recent years, in some cases seizing them in their entirety, and in others, taxing them into oblivion. These extremes of what could well be our future tax policies are not just hearsay, but are actively being researched to provide huge future sources of revenue in the event the country doesn’t produce the needed level of prosperity to service our spiraling debt load being run up during this China originated COVID emergency.

For now, the stock market sends a clear message that investors aren’t worried about anything as long as the collective spending spigot is wide open. But, when or if Janet Yellen’s suggestion for taxing unrealized market gains makes its way through Congressional committee, the market just might take exception to that idea – as well as to other new approaches to resolving the USA’s looming debt crisis.