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How a 'Wealth Tax' would kill your retirement plans. Especially if you aren't a billionaire

Updated: Oct 29, 2019

Bernie Sanders is at it again. Yesterday Sen. Sanders released the details of his proposed "Wealth Tax," and it should scare the hell out of you.

The details of the plan are as follows: A 1% tax for households with a net worth of more than $32 million for a married couple would increase to 2% for households worth $50 million to $250 million, 3% from $250 million to $500 million, 4% on $500 million to $1 billion. The tax would cap at 8% on wealth above $10 billion.

Sanders says "enough is enough." “We are going to take on the billionaire class, substantially reduce wealth inequality in America and stop our democracy from turning into a corrupt oligarchy.”

Bernie suggests that this wealth tax will raise over $4 trillion over 10 years. Providing funding for his Medicare for All, and Green New Deal plans, among others.

There's one problem with the basic idea behind this tax. The tax would seem to suggest that the wealthy billionaires are sitting on a bank account full of billions of dollars. Of course, their bank accounts are plenty full, but the Walton family does not have $150 billion sitting in the bank. Jeff Bezos does not have $190 billion sitting in the bank.

Where is that money? It's in the stock market. 90% of Jeff Bezos' net worth is in his 18% ownership of Amazon stock. 80% of the Walton family's net worth is in their 51% ownership of Walmart stock.

This begs the question. If you're going to tax 8% of Jeff Bezos' net worth, where is that money going to come from?

How this will affect your retirement portfolio

The answer is simple. To pay this tax, those in the wealthiest .1% of America are going to have to sell stock.

How much stock? That's the problem.

The complexity of stock market pricing is widely misunderstood by almost everyone outside of the market. In reality, it's actually pretty simple. Companies have value, and they offer a fixed amount of ownership stake(shares) for investors. Remember, if you have a retirement portfolio, you are an investor. If you have a pension plan, you are an investor. If your job offers a 401k, you are an investor.

Companies offer a fixed amount of shares, and they have a value investors are willing to pay for those shares, based on the value of the company. Those two go hand in hand- meaning that the amount people are willing to pay for shares also determines the value of the company. It's a balance found in the market nearly automatically thanks to the law of supply and demand.

To simplify

If a company is worth $100, and offers available 100 shares to investors, each share will be worth $1. If you cannot find enough buyers for those 100 shares, you'd have to decrease the price to the price point that investors would be willing to pay. So if there are 100 shares available and there is only $80 the market is willing to pay, then the company is worth $80, and each share is worth $0.80.

That all sounds complicated until you imagine this scenario. Let's imagine the same $80 demand for the company, but now the available shares goes up to 120 from the original 100 shares. It moved up to 120 because the owner needed to sell some of their shares to pay their wealth tax. At the original market value for the company, the price per share would now drop to $0.66. ($80/120 shares).


In short (I think we're well past that), an owner dumping shares onto the market would flood the market with supply. If the demand is not subsequently increased, the price of the shares will have to drop to meet the market price.

That's not only bad for the company, it's bad for the people who still own shares in the company. That's where you come in. Retirement funds of all kinds are invested in the stock market. Creating a market where the owners of the company have to continuously dump shares on the open market will create a large downward pressure on share prices- plain and simple.

All of that is made even more complicated by the fact that those owners selling stock will also have to pay a 15% Capital Gains Tax upon sale of the shares.

Add into that the complication that over time those stores of wealth will eventually be completely depleted. Sanders himself admits that billionaires will lose half of the net worth in 15 years. 15 years sounds like a long time, but what is the plan for 30 years from now? All of that money will be gone, and we'll be left with a world that represents something from the popular book "Atlas Shrugged" by Ayn Rand.

It all adds up to you losing value in your retirement portfolio. For what? so Bernie can raise an amount of money that wouldn't even cover half of our current yearly budget deficit.

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