Global Markets: The Implications of Kamala Harris’s Tax Plan: A Focus on Taxing Unrealized Gains

Written by Frederick Mitchell, Chief Economist.

As the United States approaches the 2024 presidential election, Vice President Kamala Harris’s tax plan has sparked significant debate across political and economic spheres. Central to her proposal is the controversial initiative to tax unrealized gains. While intended to address income inequality and bolster revenue from wealthier individuals, this proposal poses serious risks to financial markets, liquidity, and the broader economy. Understanding these implications is essential, as they could undermine capital accumulation and stifle business expansion.

Overview of the Tax on Unrealised Gains

Taxing unrealized gains entails that investors pay taxes on the appreciation of their assets, regardless of whether those assets have been sold. For instance, if an investor buys a stock for $100,000 and its value increases to $150,000, they would owe taxes on the $50,000 gain despite not having realised any cash from a sale. This approach diverges from the conventional taxation model, where taxes are applied only to realized income, raising concerns about fairness and its broader economic impact.

This divergence from conventional tax practices could have serious ramification on international capital markets and furthermore on overall market liquidity. This change in tax policy could lead to the following challenges such as:

• Capital Accumulation Challenge: The prospect of taxing unrealised gains creates disincentives for long-term investing. Investors may feel compelled to sell assets prematurely to meet tax obligations, disrupting the natural investment cycle. This pressure could lead to reduced capital growth, ultimately hindering economic development and innovation, as fewer funds would be available for new ventures.
• Decreased Market Liquidity: Anticipating tax liabilities on unrealised gains may discourage investors from buying or selling assets, leading to diminished trading volumes. A drop in market activity can widen bid-ask spreads, complicating the execution of trades without significantly impacting prices. This reduced liquidity could also increase volatility in financial markets, making investment strategies more challenging.
• Negative Impact on Equity Markets: The fundamental nature of market behaviour is at stake. The stock market thrives on optimism and the potential for future gains. If investors perceive the tax environment as unfavourable, they may shift their focus toward capital preservation rather than growth, leading to adverse effects on overall market performance.

Challenges for Business Expansion and Growth

The proposal to tax unrealised gains raises profound concerns about capital raising for business growth. Startups and small to medium enterprises (SMEs) heavily depend on equity investments for expansion. A burdensome tax framework would likely deter investors, making them hesitant to commit capital to new ventures.

The implications could be dire: a decline in access to capital would hamper existing companies’ expansion efforts while making it progressively challenging for new entrepreneurs to enter the market. This stagnation in investment threatens job creation and economic dynamism, crucial elements for sustainable growth in the American economy, not to speak about the ripple effect that would be felt across capital markets globally.

Conclusion

While Vice President Kamala Harris’s tax plan aims to address income inequality, the proposal to tax unrealised gains raises critical concerns regarding its implications for financial markets, capital accumulation, and overall economic growth for both the US economy as well as its effect globally. As this discourse evolves, it is imperative for policymakers to consider the long-term effects of such sweeping reforms.

A balanced approach to taxation that encourages investment while addressing equity concerns is essential for sustaining growth and innovation in the economy. By fostering a favourable investment climate, policymakers can benefit not only financial markets but also society as a whole, ensuring opportunities for prosperity are preserved for future generations.