It has been 60 years since The Beatles released their album Revolver with the lead song “Taxman.” Its lyrics have become classic:
If you drive a car, I’ll tax the street; If you try to sit, I’ll tax your seat; If you get too cold, I’ll tax the heat; if you take a walk, I’ll tax your feet.
Government is the most rigid construct man has ever invented, with one exception: taxes. Just like George Harrison’s lyrics so amusingly point out, there is no limit to how creative government will get if it thinks it can squeeze more taxes out of us.
One of the most absurd tax inventions is the idea that people should pay taxes on financial hot air, also known as ‘unrealized capital gains.’ These are increases in the value of assets that you have not cashed in. In other words, unrealized capital gains are assessments of how much your assets would yield in cash if you were to sell them today.
This tax already exists in Europe and is fervently debated in America, where
A new debate has erupted over the unrealized capital gains tax—UCG tax for short—in the Netherlands. One of the reasons for the debate is that it applies to cryptocurrencies, the values of which are known to be very volatile.
Given its high 36% tax rate, it is understandable that the UCG tax debate has caught international attention. This is bad enough, and it is even more troubling that the Netherlands is not the only country in Europe with this crazy tax. Norway is one of them; internet entrepreneur Fredrik Haga explains how his successful recruitment of venture capital investors ultimately forced him to pack up and leave his native country for Switzerland:
because the venture-capital investments [in his firm] had increased the company’s valuation, this so-called wealth tax meant that I faced a tax bill many times larger than my after-tax income. The only way to pay it was to sell shares and dilute my ownership in my company. I had investors, yes, but I didn’t have a luxurious lifestyle. I flew economy and lived in the same two-bedroom apartment in one of Oslo’s cheaper neighborhoods.
In other words, he did everything right as an entrepreneur. He took no income for a year; he maximized the capital in his business and developed its products and market reach; he recruited investors, created jobs, and paid taxes.
When investors rewarded him with an infusion of capital, the market value of his business increased. At that point, the Norwegian UCG tax barged into his personal finances like a bull in a china shop.
As if to prove that taxation is never absurd enough, the Dutch UCG tax shows with chilling clarity that if politicians are left unchecked for long enough, they will indeed come up with taxes that can match the ridicule in that Beatles song. How about merging a wealth-UCG tax with an income tax?
The Dutch House of Representatives on Thursday voted to pass the Actual Return in Box 3 Act … a reform that will tax residents at a flat rate of 36% on the actual returns they earn from savings and investments … the tax applies not only to income that has actually been received, such as interest, dividends, and rent, but also to the annual increase in value of assets like stocks, bonds, and cryptocurrencies, even when those assets have not been sold. [emphasis added]
This tax is even more nefarious than the Norwegian or American iterations of the UCG tax: it treats unrealized capital gains as income on the same level as realized dividends. Financial hot air is given the same tax status as actual money.
At a rate of 36%, the Dutch tax is both burdensome and complicated. It is so difficult to grasp, in fact, that some commentators lose sight of the big story. Instead, they get lost in a discussion about actual and hypothetical capital gains. This conceptual debate is based on the fact that the new Dutch UCG tax is a modification of an old one, where the new tax allegedly comes with more accurate assessments of capital gains.
It is less important—though not unimportant—exactly how government determines the actual value of the capital gains it wants to tax. The primary problem here is to what extent that tax applies to unrealized capital gains. Which is exactly the case with the Dutch tax.
Given the high rate of 36%, and given the fact that this tax applies to asset-based income as well as unrealized gains, it is practically certain that many investors in the Netherlands will be forced to sell off assets just to pay the tax. Furthermore, nobody should be fooled by the limited scope of the tax, which exempts certain stock ownership and other assets: if there is one thing history has taught us about taxes, it is that lawmakers have a tendency to expand their reach over time.
In short, assets now exempt under Dutch law are unlikely to remain exempt, especially if successful investors leave the Netherlands for less oppressive tax jurisdictions. There is no more powerful cry for higher, broader, deeper, and wider taxes than the lamentation that the most recent tax hike did not generate ‘sufficient’ revenue.
It is this line of thinking, and a great deal of tax-greed-driven legislative creativity, that creates the absurd tax on thin air that is the UCG tax. It is only a small step away from a tax on unrealized income.
Yes, unrealized income. Suppose you are a professional making €90,000 per year. You pay 40% income taxes on that money, but you still have enough left to feed your family. Suppose, now, that the government makes annual assessments of the market value of your professional skills; if you are an aircraft mechanic, they look at the market wage for aircraft mechanics.
Suppose the government finds that the market wage for your profession has gone up from €90,000 to €120,000. You still make €90,000, but the government thinks you should be making €120,000—the difference is your unrealized income gain. They will therefore tax you more: instead of the €36,000 you paid last year at the 40% income tax rate, they now want €48,000. This is the 40% on your actual income plus 40% on the unrealized income gain.
You write back to the tax agency and point out that you are now being asked to pay 53% of your income in tax. The government writes you back and asks you to go pound sand—and pay your tax bill.
