“The Big Guy” is about to become a victim of his own tax proposal

Dwight Eisenhower had a huge problem in 1948.

After winning the war in Europe and defeating the Nazis, “Ike” was one of the most popular and recognizable men in the world… and publishing houses were falling all over themselves for his memoirs.

Doubleday, a New York based publisher, won the bid by paying a massive $635,000 advance for the book rights. That’s worth tens of millions in today’s money, putting him in the same category as the Obamas’ two book, $65 million publishing deal.

Eisenhower’s problem, however, was the US tax code; $635,000 would immediately bump him into the highest income tax bracket with a 91% marginal rate, and he would have to fork over the vast majority of that income to the government.

But for some bizarre reason, the Treasury Department issued an unprecedented tax ruling in Eisenhower’s favor; they claimed that he was not a professional author subject to income tax.

Rather, the Treasury Department explained, the former general was merely profiting from the sale of an asset, i.e. his life experience, and was thus only required to pay capital gains tax of 25%.

I doubt anyone in the Treasury Department actually believed such a weak argument; most likely there were a few very powerful people trying to help Eisenhower out, and they made up some ridiculous justification to cut his tax rate.

Obviously this tax ruling no longer exists, and Eisenhower was one of the few people to benefit from it. But for a very, very short time in the United States, the government peddled the ridiculous fiction that certain ‘income’ was really just a ‘capital gain’.

There is now a growing chorus of shrieking sirens within the government that is trying to do the opposite– pretend that ‘unrealized’ capital gains are really income in disguise.

Joe Biden tried to make this case on Monday when he rolled out his new 10-year budget proposal… which is every bit as absurd fiction as Eisenhower’s tax ruling.

“Fairness” is a big part of the President’s budget proposal. Sounds good. After all, who’s not for fairness?

Except that they never bother to define their terms. Exactly how much is a “fair share”? No one actually says. All we know is that it’s never enough.

Part of his proposal is to enact a “25% minimum tax” on the wealthiest Americans with a net worth in excess of $100 million.

25% of what, exactly? Who gets to decide how much a person’s “income” is?  What qualifies as income?

It’s obvious from the President’s explanation that they want to count unrealized capital gains as income.

In other words, if you buy shares of Apple, and your Apple stock goes by 10%, they deem that 10% to be income even though you haven’t sold a single share or received any money for the investment.

This creates a lot of complications and questions.

For example, consider that Hunter Biden (by his own admission) is holding on to $10 million on behalf of the ‘Big Guy’.

Based on the President’s logic, this means that the Big Guy’s wealth, i.e. ‘income’, has increased by $10 million even though he supposedly never actually received any money.

Moreover, Hunter Biden has been able to make millions of dollars by monetizing his family’s name; this makes the Biden ‘brand name’ an obvious asset. And given all the money that Hunter has made, any reasonable financial model would easily value this brand name asset in excess of $100 million, and hence be subject to the wealth tax.

Ultimately the wealth tax is a pointless idea anyhow. Even in the President’s own budget proposal, the projected revenue from a wealth tax doesn’t move the needle on America’s endless deficits.

The proposal shows, in fact, that the US national debt still continues to rise, quickly reaching 130% of GDP and shooting well past $50 trillion… even assuming his wealth tax is passed.

Yet he also assumes that America can continue to rack up massive deficits year after year without any consequences.

Mr. Biden thinks inflation will remain low. Unemployment will remain low. Interest rates will remain low. And zero reforms will be made to Social Security and Medicare benefits, even though the programs’ trust funds are set to run out of money in ten years.

This is such a bizarre fantasy… and another important reminder that the people in charge aren’t even capable of acknowledging the problems (that they themselves have created), let alone speaking honestly about the solutions.

Now, we are not pessimistic people; on the contrary, I think there is a tremendous amount of opportunity in the world and I am wildly optimistic about the future.

However it would be foolish ignore such obvious risks.

Even the President’s new budget proposal forecasts that the national debt will spiral out of control. And interest payments on the debt will consume a greater and greater percentage of tax revenue.

The only real solution is for the Federal Reserve to slash interest rates and start creating more money again, all in an effort to bail out the Treasury Department.

We believe this will be highly inflationary. After all, when the Fed created $5 trillion during Covid, we got 9% inflation. This time around they’ll most likely have to create $15+ trillion.

But this doesn’t mean the world is coming to an end. Rather, if we can anticipate inflation over the next few years, it means we can take steps now to minimize the impact.

And it just so happens that many fantastic inflation hedges are incredibly cheap right now, some even hovering near record lows.

More on this soon.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com