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Why the Proposed Wealth Taxes Would Crash the Stock Market

Posted: 2019-09-25

Democratic nominees Elizabeth Warren and Bernie Sanders have both proposed taxes on wealth.

The Proposals

Warren's Plan

An annual tax of 2% tax on wealth over $50 million and a 3% tax over $1 billion.

Sanders's Plan

An annual tax of 2% tax on wealth over $50 million, 3% from $250 to $500 million, 4% from $500 million to $1 billion, 5% from $1 to $2.5 billion, 6% from $2.5 to $5 billion, 7% from $5 to $10 billion, and 8% on wealth over $10 billion.

Of the two proposals, Sanders is more aggressive so we will focus on Warren's. These proposals focus on net worth instead of income. Net worth is comprised mostly of cash and assets. Stocks and bonds are assets. You do not become wealthy without having a significant portion of your money invested in some way. Taxing net worth goes against the ideals we've set in this country in terms of encouraging people to invest long term. These ideals can be seen in the capital gains tax, which taxes you at a lower rate for having held stock for over 1 year. These proposals would require the yearly sell-off of assets (stocks) to pay the taxes. The wealthiest among us are business owners and CEOs whose wealth is largely connected to the value of the company.

Let's look at Amazon as an example.

Jeff Bezos

His net worth as of 9/25/2019 is 109 Billion Dollars. He owns about a 12% stake of Amazon that comes to about 103 Billion Dollars in Amazon stock. His tax rate would be $3.27 Billion Dollars the first year under Warren's plan. After is uses whatever cash he as to pay taxes he would have to sell nearly 2 million shares (assuming the current stock price) of Amazon a year to pay the tax bill which would, in turn, drop the stock price like nothing we've ever seen before. Why would any investor believe in a company in which the owner becoming less and less invested in the company?

MacKenzie Bezos (Jeff's Ex-Wife)

She owns 4% of Amazon from the divorce settlement. That put her net worth at about 34.7 Billion Dollars. That would be a tax bill of 1 Billion Dollars annually. To pay that she would have to sell nearly 600,000 shares of Amazon to pay for the tax. 

Between Jeff and Mackenzie, 2.6 Million shares of Amazon would have to be sold annually which increases the float. This would have the opposite effect of a stock buyback. It would increase supply and stock price. 

Now imagine this happening across all large-cap publicly listed companies. All Owners and CEOs would have to liquidate their assets to pay the tax bill which would cause a mass exodus from the stock market.

Being a public company would be a detriment. If business owners net worths are readily available they would be liable to these taxes. Private business owners do not have that issue. New companies would choose to remain private and public companies would try to become private again to save their value.

The proposed wealth taxes would crash the stock market.



Photo by Markus Spiske

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