First, this capital gains tax proposal seems to clearly be an opening offer. But let's have some fun and consider how it changes the strategy for investing the PA.

Immediately 401k, IRA, Roth IRA instruments just became incredibly more valuable 1/n

Assuming no liquidity/cost of living limitations, the logic of maximizing pre-tax 401k contributions, regular IRA (and then Roth converting) every year so you have capital that can grow without cap gains leakage is just huge. 2/n

Now it was already a nightmare to live in a high tax state in a high tax bracket and deal with ST cap gains but now there is no difference between a 5 year hold and a 5 day hold? Let's set aside how absurd that is versus the ability of real estate to pass through depreciation 3/n

But now the "never sell" case starts to make a lot more compelling sense. And that means, assuming your fundamental forecast is close to accurate, entry multiple, and incremental capital allocation decisions by mgmt matter, because selling is an expensive decision 4/n

So for the koala, whose cost basis on Vale is ~$10/sh, in what world would I ever sell this position given on my numbers it will do $2-3/sh FCF per yr with steady production/some growth, and all that FCF is either a dividend or (and now much more preferably) a buyback 5/n

I would have to have an incredibly compelling alternative use of capital that more than offsets the tax leakage of selling or Vale would have to get STUPID expensive. And instead why not just borrow 10% of the value of Vale position, use leverage to fund said opportunity 6/n

I don't pay taxes on that margin loan, which I can amortize with dividends from my portfolio. Now margin/portfolio leverage can be dangerous if taken to extremes but it becomes a very powerful instrument in a high tax environment. 7/n

But it means a new suite of equities with lower vol will become far more compelling in the market. The after-tax reward of speculating on commodities, currencies, crypto, and in general high vol / super cyclical assets would be eviscerated. 8/n

The appeal of cash generative businesses with economic returns and a moat versus speculative opportunities grows. Consider Berkshire Hathaway...9/n

If BRK can do a 8-10% ROE consistently, with a constant multiple, why can't I borrow 3-4% of the initial value of that BRK position each year, pay no taxes, use that to fund liquidity requirements in a tax efficient manner, and the equity compounding manages the LTV easily 10/n

Now that is totally dependent on what the interest rate is on the loan and doesn't take into account the potential for multiple volatility, but having a high level thread here. But what this all means is something very important: this cap gains tax hike won't hit the wealthy 11/n

Who this will hurt are those that are trying to grow and create wealth that don't have access to sophisticated portfolio tools. My BRK hypothetical portfolio loan works if you are a HNW client who can borrow at <5% APR, but not if your using broker margin at 8% (for example) 12/n

And if you have created an amazing start up that is valued at $10MM because it has potential but is still years away from cash flow and still has failure risk (could be a $1Bn exit or a flop, so a high vol asset), your calculus has changed if an exit is considered. 13/n

A longwinded way of saying "all a higher LT cap gains tax rate will do is encourage the use of leverage in portfolios, reduce the recycling of capital in the economy, and reduce speculation while promoting lower vol 'sharpe ratio' optimal investments on a relative basis" 14/n

In fact, back to that start up or frankly ANY successful venture, you are now incentivized to take stock in an acquiror instead of cash just to defer the taxable event. 15/n

So let's say I don't know First Quantum was for sale & Rio Tinto wanted to buy it. Even if Rio Tinto is probably overvalued here, the question is actually "is it so overvalued that a potential normalization is greater than the tax hit of taking a cash offer instead" 16/n

Now that will depend for every investor in FM in this hypothetical depending on their cost basis, but it means something more relevant - higher capital gains will encourage big companies over small companies. 17/n

Because an enterprenurial team like FM can de-risk their net worth by becoming a part of Rio Tinto, making FM stock into RIO stock which is lower vol, and then my portfolio leverage point kicks in as a way to monetize without tax leakage. 18/n

Now depending on if this would apply to 2021 transactions (versus start 1/1/2022) this may incentivize some M&A deals that would have happened in 2022/23 to happen in 2021. Koala has one particular in mind. But not going to tell you. 19/n

A simple koala proposal for how to improve taxation while encouraging long term investing, remember that quip about depreciation in real estate at the beginning of this thread? 20/n

Let investors depreciate 20% of cost basis from a stock position every year on their taxes. All gains are taxed as regular income when realized no matter the hold period, cost basis reduces each year from depreciation. You've just created a real incentive to hold long term 21/n