Originally Appeared in the Wall Street Journal

Sen. Ron Wyden’s proposed “billionaires tax” on accumulated capital gains got thrown out of the latest version of the massive spending bill—but not before winning the endorsement of President Biden and Treasury Secretary Janet Yellen. It’s disturbing that they would even consider a plan that would put a stake in the heart of U.S. capital markets, dwarfing whatever benefit it might provide for social programs.

American public capital markets have been shrinking for decades. There are half as many public companies today as there were in the late 1990s. The costs of going public and being public are high and being pushed higher by an ever-increasing panoply of disclosure and governance requirements. Although initial public offerings have surged recently, in part because of high valuations and the rise of blank-check companies, Mr. Wyden’s “billionaire” tax would put a quick end to any long-term comeback by imposing, for the first time in U.S. history, a capital gains tax on assets’ unrealized gains. Since the country’s founding any capital gains taxes have applied only when an asset is sold.

The fundamental flaw in Mr. Wyden’s approach is that it penalizes stock holdings in public companies but leaves other types of investments largely untouched. Billionaires would pay a 23.8% tax on unrealized gains in the value of their public stocks. But on privately held companies or real estate, they’d face only an annual interest tax of approximately 1.25%, which wouldn’t be due until the asset is sold. Mr. Wyden’s bill is designed this way because public stocks are actively traded and therefore taxes on them are easier to calculate. The result would be the discouragement of public investment.

How Mr. Wyden’s tax would apply to other financial assets, such as debt and cryptocurrency, would be left to the Treasury secretary to determine. If she concludes they are actively traded and readily valued on an annual basis, they’d be subject to the 23.8% tax as well. This isn’t an easy task and would surely face implementation challenges.

In this sort of environment, why would entrepreneurs take their companies public? Billionaires who invest in venture capital will be asking the same question. The benefits of potentially larger multiples in the public market would be nullified by the prospect of annual payments of the Wyden tax, which could otherwise be avoided. The cost to the U.S. economy would be notable. In 2021 American IPOs, including GitLab and Robinhood, have minted at least 19 new billionaires so far.

Many public companies are controlled by billionaire founders through dual-class share structures. In recent years nearly 20% of all U.S. IPOs have resulted in founder-controlled companies. Those billionaires might seek to delist their companies to avoid the Wyden tax.

Private markets are increasingly able to support the capital needs of large startup private companies with $1 billion or $10 billion valuations, often referred to as unicorns or decacorns. Today, there are 472 unicorns and 14 decacorns in America. Close to $2.7 trillion was raised in private markets in 2019, more than twice as much as was raised in public markets. The returns from private equity and venture capital have historically beaten those from public markets.

But a further shift toward private markets would shut out the more than 90% of U.S. investors and retirees who don’t meet the minimum wealth and income requirements for private investment. Mr. Wyden would enhance the opportunities exclusively available to the wealthy while severely limiting the options of middle-class savers.

Aggravating this effect, many billionaire owners would have to sell large numbers of shares to pay their annual tax bill. The stock sales would be particularly large for the first few years after enactment, because the bill is designed to apply retroactively. Elon Musk and Jeff Bezos would be required to pay the Wyden capital gains tax of 23.8% on the total appreciation of value for Tesla and Amazon from the date their companies were founded. Given that U.S. billionaires own more than $3.4 trillion in stock, or more than 7% of total American equity market capitalization, these massive sales would negatively affect all investors, including 401(k) and retail-account holders.

This supposed tax on the rich would in fact hit everyday investors and companies, punishing Americans who depend on public capital markets that were once the envy of the world.

Mr. Scott is an emeritus professor at Harvard Law School and director of the Committee on Capital Markets Regulation. Mr. Gulliver is the committee’s research director.