by Michael Hiltzik
After years of largely theoretical discussion among Democrats, the idea of a billionaires tax has now become official policy.
Kudos to President Joe Biden for putting the billionaires tax on the table as part of his budget proposal for fiscal 2023. A means of forcing the richest of the rich to pay their fair share of taxes has long been overdue.
Until now, the idea has been identified with the liberal wing of the Democratic Party, proposed in the past by Sens. Elizabeth Warren of Massachusetts and Ron Wyden of Delaware, as well as Sen. Bernie Sanders, I.-Vt.
Biden has now made it mainstream, though his plan is somewhat more modest than the others — his proposal for a wealth tax would raise about $360 billion over 10 years, according to the White House, less than Wyden’s ($507 billion) or Warren’s ($2.75 trillion). The differences arise in part from where the tax would start and how it would be calculated.
The earlier proposals provoked a chorus of hand-wringing from our beleaguered billionaire class.
Billionaire Elon Musk tried to tweak Wyden over his proposal, which like Biden’s targeted unrealized capital gains — that is, gains in the value of assets such as stocks and bonds before they’re sold. Wyden responded that Musk’s approach of turning tax policy into a game merely underscored the necessity of a wealth tax.
So will this plan, especially because it takes direct aim at the capital gains tax, the favorite loophole of the wealthy.
Biden’s proposal is for a minimum 20% tax on the income of households with more than $100 million in wealth. The White House says that more than half the revenue would come from households worth more than $1 billion.
The White House last September estimated the 400 wealthiest families in America paid an average federal individual income tax rate of 8.2% on $1.8 trillion of income between 2010 and 2018. “A firefighter or teacher can pay double that tax rate,” Biden said in his budget statement Monday, citing the earlier estimate.
Biden’s focus on the treatment of capital gains is proper. The reason is that capital gains, which enjoy preferable treatment in several respects, provide most of the income reported by the wealthy. The richer you are, the more of your income receives that happy treatment.
How do capital asset owners make out like bandits at tax time? Let us count the ways. First, the maximum tax rate is lower — 23.8% (including the net investment income tax of 3.8%), compared with the 40.8% top rate on ordinary income.
Then there’s the fact, as the late tax expert Edward Kleinbard of USC never tired of pointing out, that the tax is our only voluntary tax: It’s levied only if and when the owner chooses to sell.
If it’s still in the owner’s estate at death, all the embedded tax is extinguished forever — the heirs have to pay tax only on the difference between the asset’s value at the previous owner’s death and its value when they sell, rather than the difference between its purchase price and their sale price.
Biden is absolutely correct in targeting the manipulation of the capital gains tax for eradication by proposing a minimum billionaires tax that includes unrealized capital gains. “This approach means that the very wealthiest Americans pay taxes as they go, just like everyone else, and eliminates the inefficient sheltering of income for decades or generations,” Biden said in a fact sheet issued Monday.
You’ll probably be hearing from water-carriers for the rich that taxing unrealized gains doesn’t compensate asset owners for their losses in down years. The numbers show that this is a made-up problem: The stock market has been a very reliable engine of wealth growth and remarkably resilient even during what the average person might consider bad times.
Even during the worst economic stretch of the last 100 years, the Great Depression (defined for our purposes as January 1929 through the end of 1939), the stock market lost an average of 0.6% a year.
In any event, Biden’s proposal would give the target households up to nine years to fork over what they owe on existing unrealized gains and five years to pay the tax on new income. That would “smooth year-to-year variation in investment income,” the fact sheet states.
The coming debate over Biden’s tax proposal will probably focus in part on its constitutionality. Biden’s characterization of the levy as a “Billionaire Minimum Income Tax” — emphasis on the word “income” — is designed to keep the proposal within the exemption for income taxes from the constitution’s strictures on how taxes must be calculated.
That’s clever, but addresses just one of the untold ways that spokespersons for the wealthy will try to eviscerate a plan that hits them in their well-fattened pocketbooks. With so much money at stake, the battle could be ferocious.
