Net Worth Isn’t Cash

Let’s talk about wealth for a minute. There has been talk about the rich paying their fair share. Someone made a comment to me the other day that anyone who is a billionaire should be able to pay some part of that into taxes. I had to explain why it’s not that simple. To be clear of my cards, i’m currently in an income level that places me in the top 20% but not the top 1% by any stretch. The place I sit is in the one that is the most taxed. So don’t get me wrong, that’s not exciting. Simultaneously, when you look at the percentages the highest percentages are in the top 20% by a long run. How asset values are discussed mostly involves a lot of financial magic that equates to pulling a rabit out of a hat, or in this case a rabit out of air.

Net Worth Calculations
Most of net worth, what we use to qualify someone as a millionaire or billionaire, is based on total assets. So companies are a portion of this issues. To bring it to a ground level, this means that your house is part of what qualifies your net worth. So, taxing on this at a federal level would be equivocal to having to to an appraisal of your house every year. (It’s arguable that this occurs already because of property taxes. So imagine that frustrating process occuring over and over again across everything you own.)

Valuations are problematic
The problem is less about your home value. That is a well trodden path. The problem is more in the private companies you own that are currently not taxable and figuring out the value of them. I was discussing an equity splitout of a potential business with some friends last week. To be clear, we’re discussing splitting equity of something that has $0 of value. Now, if someone wanted to buy that “company” right now at $10000 then the value would automatically go from $0 to $10000. You could tax that right? Sure, but all that means is the person who just bought it is having to pay taxes on $10000 of something that has earned literally $0. Valuations work similar to this. They aren’t based on the past performance of a business so much as an expected future reward.

There’s a reason that realization is encoded in our tax law.
To the previous section about the magic of valuations there’s a great MIT article called “If you’re so smart, why aren’t you rich?” and the truth of that article resounds here. No one has a great read on the pulse of this kind of thing and everyone can argue for a different number. Realization is a big deal because it’s the actual money made and from which someone might benefit. So that’s less about what you own and more about what you make.

Any move away from the foundational thoughts around realization, even with the constraints I’ve seen on proposals about how something like this would work, seem like something that would be extremely difficult to codify. This seems like a harder path than allowing for innovation that would increase our GDP.

What about you? Do you think this is more helpful than other levers we could pull?