Why the Unrealized CGT Proposal Misses the Mark
5 min read
The recent push for an unrealized capital gains tax has sparked debate, but there’s a more fundamental issue at play: the underlying assumption that increasing taxes is the solution to our nation's financial problems. The truth is, raising more tax revenue will never result in better services or a stronger economy. What we need and what we successfully fail to demand is a stronger oversight on government spending to ensure taxpayer dollars are used efficiently and effectively.
Now, I don’t wish to get political in my financial planning blog, but one of the two presidential candidates proposed the notion of forming a commission for government efficiency. A commission tasked with conducting a complete financial and performance audit of the entire federal government sounds amazing. Not that I’m gullible enough to think this will solve everything—or even happen as promised—but it's still a far better narrative to run on than raising taxes, and a more effective use of our tax dollars than most (I say, more than 80%) of the existing government programs.
The Flaws in Tax Hikes
Taxes are an essential part of any functioning government. Like John Stewart said, in theory, we pay taxes, and the government uses that money to provide essential goods and services—roads, public safety, education, and healthcare. But, what happens when the government fails to use that money wisely? More taxes don't necessarily lead to better outcomes. Instead, we get waste, inefficiency, and misaligned priorities.
Unrealized capital gains taxes, for instance, would tax high net worth (100Mil+) individuals on theoretical income—gains on investments they haven’t yet sold or profited from. This goes against the basic premise of how income should be taxed: when it's realized. Worse yet, it opens the door to unpredictable financial burdens, especially when markets fluctuate wildly. Those who are “wealthy on paper” but lack liquid assets could be forced to sell off investments prematurely just to pay their tax bill.
Spending Oversight Is the Key
The real issue isn't that we need more taxes; it's that we need smarter government spending. Here’s how the system should be working: we pay taxes to the government, the government pools that money, and uses it to provide the people with essential goods and services. In America, however, we have a system that's designed to grossly benefit private corporations instead of the public.
Take healthcare, for instance. In an ideal world, the taxes we pay would go directly toward providing quality healthcare to everyone. But that's not what happens. Instead, the government funnels our tax dollars to for-profit insurance companies like UnitedHealth, Aetna, and Humana, which generate over 75% of their revenues from the subsides of government programs. These companies make their profits off of our tax payments, while we still have to pay premiums, deductibles, and out-of-pocket expenses. It’s a well-designed system—if you happen to own an insurance company.
The graph shows the Year-To-Date return of 28.64% for the iShares U.S Insurance ETF (IAK) [blue] vs. the Standard and Poor’s 500 index (^GSPC) [pink] return of 20.30%. -A bigger difference than you imagine since the former has a beta of 0.65 vs. the index’s beta is of course, 1.00
Now, consider the performance of the iShares U.S. Insurance ETF (IAK). The Year-to-Date return shows an impressive 28.64% compared to the S&P 500’s 20.30%. This difference is even more notable given $IAK’s beta of 0.65, meaning it's less volatile than the broader market (which has a beta of 1.00). So despite the lower risk, IAK has managed to outperform the market by over 8%.
This illustrates my continued point from previous post: in today’s market, low-beta assets like insurance and utilities have greatly benefited. Could it be because their revenues rely so heavily on government subsidies derived from taxpayer dollars? I don’t have the definitive answer, and this is of course is not an endorsement (because, after all, you’re a reader, not my client). But this has certainly influenced my investment decisions—leading me to allocate more of my portfolio into these sectors.
But I digress, this isn’t just a healthcare problem. We see it in the pharmaceutical industry, in oil and gas, in higher education. The taxpayers continue to subsidize these industries, while the corporations make massive profits, leaving us to pay so-called “free market” rates for their products. It’s a classic double-dip. The last time you saw someone double-dip, you probably called them out on it—so why aren’t we calling out the government for letting corporations do the same with our tax dollars?
The Path Forward
Instead of introducing new, complex taxes like the unrealized capital gains tax, the government should focus on exercising better control over how taxpayer money is spent. We should be investing in infrastructure, healthcare, and education that actually benefits the public, not in propping up corporations that thrive on government contracts while still charging us market rates.
The answer isn’t more taxes. The answer is better spending. With stronger government oversight and accountability, we could do more with the taxes we already pay—ensuring that every dollar benefits the public rather than padding corporate profit margins. Until that happens, raising taxes—whether through unrealized capital gains or other means—will only exacerbate the inefficiencies in the system.
I’ll admit, my mind has been set for quite a while now. It’s a simple decision for me. Since I don’t consider myself politically savvy enough to debate the flaws of the two-party system, I just ask myself two questions:
What party admits their is something wrong that needs to be fixed? BOTH
Now, which party says the solution is more tax revenue? That’s the one, you DON’T vote for!
Here’s a fun fact: Did you know that operational issues account for over 60% of hedge fund closures? -Most people assume that investment performance is the primary reason for hedge fund failures but operational inefficiencies and mismanagement are actually the leading causes. With that in mind—and considering a government deficit of $1.9 trillion—is the solution really to just throw more money at the problem, or vote for the candidate that may do more to fix or look into the operational side of the government?
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