John Klar: The government is considering a financial weapon of mass destruction

By John Klar

Since the creation of the United States income tax, government and taxpayers have wrangled over definitions of what constitutes “income,” how it is to be calculated, and when it is to be “recognized” — that is, subjected to tax. A recent New York initiative (predictably backed by Alexandria Ocasio-Cortez) would tax appreciated assets held by wealthy taxpayers before they were sold.

This hideous tax policy hints at the temptation for government to shift its tax base to rapidly-appreciating assets when magnifying inflation through reckless debt monetization:

A new tax is being proposed by progressive lawmakers and activists that would impose a new form of capital gains tax on New Yorkers with $1 billion or more in assets[.] … With New York state staring at a $13 billion deficit … [l]awmakers are proposing a new kind of mark-to-market tax on unrealized capital gains. Currently, taxpayers pay capital gains tax on assets only when they sell.  The new policy would tax any gain in value for an asset during the calendar year, regardless of whether it’s sold.

The complexity of this state tax law would be profound. And what of assets subsequently sold at a loss — will the state refund the taxes on the phantom gain that it “recognized” the previous year

In 1920, when America grappled with the issue of whether capital gains constituted taxable income, the United States Supreme Court settled the matter in Eisner v. Macomber. Eisner concerned the government’s effort to tax as income a stock dividend (a dividend issued not in cash, but as an additional pro rata share of stock).  The Court did not mince its words:

Yet, without selling, the shareholder, unless possessed of other resources, has not the wherewithal to pay an income tax upon the dividend stock. Nothing could more clearly show that to tax a stock dividend is to tax a capital increase, and not income, than this demonstration that, in the nature of things, it requires conversion of capital in order to pay the tax[.] … [E]nrichment through increase in value of capital investment is not income in any proper meaning of the term. (pp. 213, 214-215).

AOC and “Tax Fairness” advocates cannot constitutionally tax unrealized capital appreciation.  But the attempt reveals an insidious threat. Massive federal spending under COVID will create seismic inflation of asset values while crushing real wages and economic growth. If the government shifts its tax base from income to capital appreciation, it will perpetuate its own fiscal sustenance by taxing the inflation it has unleashed.

This concept of taxing “gain” that is attributable to inflation is behind the current Dem push to tax wealthy New Yorkers for holding on to assets in an inflationary cycle. Calling out Federal Reserve chairman Jerome Powell for essentially giving Congress a green light to print money without fear of rate hikes, Wall Street Journal writer Joseph Sternberg cautions:

Treasury will benefit from Mr. Powell’s success in stoking stock and other asset markets to record highs over the past year even as the pandemic and attendant lockdowns throttled the Main Street economy.  The growing disconnect between Wall Street prices and Main Street profits holds open the prospect that capital-gains taxation will grow ever more reliable as a revenue source.  Expect lawmakers to take full advantage[.] … The government traditionally relied for revenue on the economy’s underlying productivity.  The overall dependence on personal-income and corporate-profits taxation ties fiscal health to wage growth and corporate success.  This was a practical incentive, although not always a strong or effective one, for lawmakers to care about the Main Street economy[.] … To make the government proportionately more dependent on Fed-inflated capital gains, as Democrats are wont to do, would weaken an important tie between Congress’s fiscal role and the real economy.  This is especially dangerous given mounting evidence in the economics literature that monetary and financial excess saps Main Street productivity rather than bolstering it.

Traditional economic theory held that the overprinting of money (à la Zimbabwe) causes inflation.  The Federal Reserve has generally viewed the economic world similarly, noting in a video that “when the money supply increases, and neither velocity nor quantity changes, the price level must also increase — we call this inflation.” This principle has been challenged with Quantitative Easing, which was touted as the new modern money supply solution to those old crusty economic restraints.

This led some in the Federal Reserve to chart new fiscal territory:

Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” We are currently engaged in a test of this proposition[.] … In my view, recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised.

These are sweet-smelling words to the money-printers, foreshadowing the reckless gate-flinging debt monetization now embraced by the federal government and unchallenged by a COVID-anxious citizenry. But Quantitative Easing was premised on the idea that it would be followed by Quantitative Tightening in an improved economy. That has never been witnessed.  Instead, real wages continued to decline following the 2007–8 financial implosion, consistent with economists’ warnings that wages could not keep pace with inflation.

Contrast today’s fiscal America with Ron Paul’s warning to Congress in 1978:

When the federal government spends money it does not have … and pays the bills by creating new dollars out of thin air, the value of each existing dollar must fall[.] … The government also creates new money in the banking system, by a complicated process called monetizing the debt.  What this all amounts to is inflation. (p. 108)

The federal government has now monetized some $10 trillion in COVID “relief” that may prove to be the final nail in the American fiscal coffin. Joseph Sternberg is warning of the temptation for AOC and others to tax not real income, but inflationary growth fueled by debt monetization (money-printing). The potential for an “IWMD” (Inflationary Weapon of Mass Destruction), unleashed and then uncontainable, cannot be overstated.

But this shift depends on the Ponzi-like proliferation of ever more debt — Quantitative Tightening becomes catastrophic.  This scheme will work only so long as the money keeps flowing — a post-COVID economic decline and spiking inflation will likely serve as justification not to hit the brakes on debt monetization, but to keep those fiat-printing mechanisms fully primed to “stimulate the economy.” Then there’s universal income.

In seeking to tax unrealized income from hyper-inflated capital assets, AOC, et al. are launching an aggressive, unconstitutional plan to destroy the national economy while growing government limitlessly.  Given her past pronouncements, she likely understands this travesty even less than she comprehends cow farts.

What is terrifying is not that AOC is calling for insane monetary policy and whole new means of tax takings. What is terrifying is that almost no one is raising the fiscal alarm.

John Klar is an attorney and farmer residing in Brookfield, and the former pastor of the First Congregational Church of Westfield. This commentary originally appeared at American Thinker.

Image courtesy of Flickr/401kcalculator.org

5 thoughts on “John Klar: The government is considering a financial weapon of mass destruction

  1. The Great Reset isn’t fiction. The attempt to define a new world order, ruled by technocratic elites– the same types that gave us the “science” of Covid-19– isn’t fiction. That one of the slogan’s Joe Biden used, “build back better,” is exactly the same as the slogan of the Great Reset, isn’t speculation. https://www.weforum.org/agenda/2020/07/to-build-back-better-we-must-reinvent-capitalism-heres-how. Economics, social justice, CO2 warming pseudoscience: it’s all part of the plan.

    They’re telling us what they intend to do. This has been going on for years, and the theory of CO2 warming was part of the attempt to scare people into submission. Didn’t work, as people pretty much did whatever they wanted. But Covid-19 worked.

    If they really wanted us to get back to normal they’d stop putting the jackboot on medications like ivermectin when the science on this is very clear: it’s safe and effective. Yet there’s a very good chance that your doctor is unwilling to prescribe this. Your doctor has been steered; my doctor has been steered.

    Texas and Florida and other states are saying, “no more.” This is what they fear the most, as Biden and Fauci and the CDC director are coming out full force and telling us that we must not go back to normal. It’ll never end, though: Klaus Schwab, head of WEF and one of the architects of the Great Reset, came right out and said it: we’re never going back to normal. Fauci: you’ll be wearing masks until 2022 or beyond. That’s why Florida and Texas are such a threat to their designs, and that’s why people like Governor DeSantis are leading the way toward taking back our future.

    There’s a reason why there’s such a movement to rewrite everything and that reason has nothing to do with individual freedom and liberty. It has everything to do with, “you won’t own anything, and you’ll be happy.” Yes, that’s what they say: they’re telling us what they plan to do.

    As Nancy said, “Just say no.”

    • https://ivmmeta.com/

      The WHO has just today come out recommending against the use of ivermectin to treat Covid-19.

      The jackboot has come down hard on ivermectin, a cheap and readily-available drug with ample evidence to demonstrate safety and effectiveness.

  2. This is precisely what’s happening in Europe – and the extreme progressives here have been communicating with the socialists there for quite some time.

    Another example – an investment in a shipping company in Europe will be taxed not on what the investment actually earned and distributed to shareholders. It will be taxed on what it should have earned based on tonnage capacity.
    Germany has successfully stolen hundreds of billions from elderly investors using the methods AOC and her band of thieves seek to adopt here.
    We have to support millions of illegal aliens somehow – and this fits the bill.

    Nobody actually thought these young progressive thieves came up with this all on their own, did they? They’re not that bright.

  3. It’s not a financial weapon of mass destruction. It’s (not-so) quicksand. And while we’ve been sinking in it for decades, now we’re about to go under because we’re deep into it – right up to our chins. As Hemmingway wrote in the Sun Also Rises – ‘How did you go bankrupt’, he asked. ‘Gradually, at first. Then suddenly.’

    “Half the harm that is done in this world is due to people who want to feel important. They don’t mean to do harm– but the harm does not interest them. Or they do not see it, or they justify it because they are absorbed in the endless struggle to think well of themselves.” – — T. S. Eliot

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