To help pay for his big economic and social agenda, President Joe Biden is looking to go where the big money is: billionaires.
Biden never endorsed an outright “wealth tax” when he campaigned for the White House last year. But the more conventional rate increases that he’s proposed on the income of large corporations and the wealthiest Americans have hit a roadblock.
That leaves a special tax on the assets — rather than the income — of billionaires being proposed by a Senate Democrat as a possible way to help pay for child care, universal prekindergarten, child tax credits, family leave and environmental initiatives.
Biden has pledged that his programs won’t add a penny to the deficit, which means selling to Congress and voters a tax on the wealthiest .0005% of Americans.
Some details on the proposed billionaires tax:
HOW IT WOULD WORK
Essentially, billionaires make the bulk of their money off their wealth. This might be from the stock market. It could include, once sold, beachfront mansions or the ownership of rare art and antiquities. Even a triceratops skeleton.
This new tax would apply solely to people with at least $1 billion in assets or $100 million in income for three straight years. These standards mean that just 700 taxpayers would face the additional tax on increases to their wealth, according to a description obtained by The Associated Press of the proposal of by the chairman of the Senate Finance Committee, Sen. Ron Wyden, D-Ore.
On tradeable items such as stocks, billionaires would still pay a tax even if they held on to the asset. They would be taxed on any increases in value and take deductions on losses. Under current law, those assets get taxed only when sold.
Billionaires also would face an additional tax on nontradeable assets such as real estate and business interests once those assets are sold. During the first year of the proposed tax, billionaires also would owe taxes on any built-in gains that predate the tax.
HOW MUCH WOULD IT RAISE?
House Speaker Nancy Pelosi, D-Calif., has estimated that the tax would raise $200 billion to $250 billion — certainly a meaningful sum but still well shy of the nearly $2 trillion in proposed additional spending over 10 years being negotiated.
That means additional levies — such as a global minimum tax and increased enforcement dollars for the IRS — still would be needed to help close the gap.
And the forecasts for revenue from the wealth tax are highly debatable.
“It’s just impossible to implement,” said Allison Schrager, a senior fellow at the conservative Manhattan Institute. “There’s a lot of evidence that these things don’t work, and I’ve never heard an explanation of how this could be workable.”
WHY WOULD BIDEN GO THIS ROUTE?
The president would rather raise corporate tax rates and rates on wealthy individuals. That was his initial proposal. But he needs to appease Sen. Joe Manchin, D-W.Va., and Sen. Kyrsten Sinema, D-Ariz. — the two make-or-break Democratic votes in the evenly split Senate.
Sinema objected to higher rates, which brought the wealth tax into play as an alternative.
The idea gained steam after the publication of French economist Thomas Piketty’s book “Capital in the Twenty-First Century.” Sen. Elizabeth Warren, D-Mass., made a 2% wealth tax a trademark policy in the 2020 presidential primaries. And fellow candidate Sen. Bernie Sanders, I-Vermont, proposed his own wealth tax.
Biden never jumped on that bandwagon. But he made higher taxes on the wealthy a key promise, saying no one making less than $400,000 would pay more.
IS A WEALTH TAX CONSTITUTIONAL?
If passed, it probably would be challenged in court, most likely under Article 1, Section 2 of the Constitution, which says: “Direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers.”
That means revenues from “direct” taxes must reflect the population of the states, which is a problem because billionaires tend to cluster in places like California and New York.
If that’s the case, how does the federal government charge income and payroll taxes? That’s because of the 16th Amendment, which allows Congress to “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States.”
So what really matters is whether the Supreme Court would interpret a wealth tax as a direct tax on property, which would be unconstitutional, or whether it’s essentially a tax on income, which is permissible.
ARE BILLIONAIRES REALLY THAT RICH?
America’s billionaires have seen their collected wealth surge 70% since the start of the pandemic to more than $5 trillion, according to an analysis by the pro-wealth-tax Americans for Tax Fairness and the Institute for Policy Studies Program on Inequality. That gain from March 18, 2020, to this past month is equal in size to Biden’s spending plans over 10 years.
There were 614 U.S. billionaires at the start of the pandemic. That figure has now grown to 745.
“Right now, billionaires are not paying a dime in taxes on their fabulous income gains from their stock holdings during the pandemic,” said Frank Clemente, executive director of Americans for Tax Fairness. “The billionaires income tax would tax the increase in the value of those assets each year, just like workers’ wages are taxed.”
CAN BILLIONAIRES ESCAPE TAXATION?
They’ve found ways before.
They can hire armadas of lawyers, accountants and others to minimize their tax burdens. The news outlet ProPublica revealed various tax shelters with IRS data earlier this year, and the recent Pandora Papers showed there is a global industry to shelter the assets of the politically powerful and extremely wealthy.
The ProPublica investigation showed that Warren Buffett paid an average rate of 19%. Amazon founder Jeff Bezos paid 23%. Tesla’s Elon Musk was at roughly 30%. The top tax rate on income earned from labor is 37%, but the tax on capital gains is a lower 20%, and that favors those with extreme wealth. The lower capital gains rate can also encourage more investment in new companies that help the economy grow.
A White House analysis in September indicated the country’s 400 wealthiest families paid an average federal income tax rate of 8.2% between 2010 and 2018. The administration’s fundamental message is that a rate this low is unfair because middle class families often pay a greater share of their income in taxes.