I read somewhere on X a while back that the inability of people to think through the secondary and tertiary impact of decisions is destroying us. I’ve thought a lot about that since.

Let’s take taxing unrealized gains. Setting aside, for a moment, the fact that the government is already too big and a tax like this is utterly unfair, let’s think through a couple of the possible – even likely – secondary and tertiary impacts if we did it.

Let’s say that I own a stock that goes up 20% in a year. Great! When the tax man comes for the tax on the “gains,” I don’t have the cash. What do I do? I sell some of the stock to raise the cash to pay the tax. The result is that the stock in which I’m invested declines (more shares for sale = lower stock price). The aggregate impact is to depress the equity market.

Furthermore, I am no longer a long-term investor. My horizon can no longer be more than a year, because then I need to get my cash out to pay taxes. So businesses make decisions based on that time horizon. The end of the year becomes a dynamic time of layoffs and juicing numbers to pay the first wave of investors and attract next year’s investors. Long term projects and employment become less attractive to investors.

If I’m a sole proprietor and I experience an increase in the theoretical valuation of my company (“theoretical” because valuation estimates are always a guess until there is a willing buyer and a willing seller), then I might need to sell off part of the company, lay off employees, and restrict investing in more growth because I need to pay the tax man. Again, the negative impact of these decisions is felt by employees and consumers.

All of this is assuming that such a tax does not bleed down to the middle-class, which it will. Taxes always expand once they are allowed to take root. In fact, we already have a tax on unrealized gains – the property tax. As some local bureaucrat tells you what he/she thinks your house is worth, you have to pay the tax on that valuation. The result is one of the most regressive taxes we have. Little old ladies on Social Security and disabled war veterans are losing their homes because those houses because they can’t afford the property taxes. They can’t afford those property taxes because the taxes are indexed to something that isn’t actually money that the owner can spend. This is why consumption taxes or income taxes work.

The impact of taxing unrealized gains is not going to be “soak the rich.” The rich will be fine. They have the ability to move money and make rational decisions to increase and preserve their wealth. The impact will be on the middle and lower classes who can’t afford the largesse of politicians.