New Wealth Tax Proposal Explained: Which Americans Would Face Additional Taxes on Assets?
President Joe Biden is looking to go where the bulk of the money is: the billionaires.
Biden never endorsed an outright “wealth tax” during his campaign last year. But his proposals for more conventional rate hikes on the incomes of big business and wealthier Americans have met a roadblock.
That leaves a special tax on the assets, not the income, of billionaires proposed by a Senate Democrat as a possible vehicle to help pay for child care, universal preschool, child tax credits, family leave. and environmental initiatives.
Biden vowed his programs wouldn’t add a dime to the deficit, which means selling Congress and voters a tax on the richest 0.0005% of Americans. Some details on the billionaire tax proposal:
How would that work?
Essentially, billionaires get most of their money from their wealth. It can come from the stock market. It could include, once sold, mansions by the sea or the ownership of rare art and antiques. A skeleton of triceratops.
This new tax would only apply to people with at least $ 1 billion in assets or $ 100 million in income for three consecutive years. Those standards mean that only 700 taxpayers would face the additional tax on increases in their wealth, according to a description obtained by The Associated Press of the proposal from Senate Finance Committee Chairman Ron Wyden of Oregon.
On tradable items such as stocks, billionaires would still pay tax even if they owned the asset. They would be taxed on any increase in value and would benefit from deductions on losses. Under current law, these assets are only taxed when sold.
Billionaires would also face an additional tax on non-marketable assets such as real estate and business interests once those assets are sold. In the first year of the proposed tax, billionaires would also have to pay taxes on any built-in pre-tax earnings.
How much money would that bring in?
House Speaker Nancy Pelosi estimated on CNN on Sunday that the tax would increase from $ 200 billion to $ 250 billion. That’s a significant amount, but it is well below the nearly $ 2 trillion in additional spending proposed over 10 years currently being negotiated. This means that additional levies such as the global minimum tax and increased application dollars for the IRS would still be needed to help close the gap.
And the wealth tax revenue forecast is highly questionable.
“It’s just simply impossible to implement,” said Allison Schrager, senior researcher at the conservative Manhattan Institute. “There’s a lot of evidence that these things don’t work, and I’ve never heard of an explanation as to how it might be possible.”
Why would Biden go this route?
The president would prefer to increase corporate tax rates and high net worth individuals rates. That was his initial proposal, but he must appease West Virginia Senator Joe Manchin and Arizona Senator Kyrsten Sinema. These are the two decisive Democratic votes in the Senate equally.
Sinema opposed higher rates, which brought wealth tax into play as an alternative.
The idea gained momentum after the publication of the book by French economist Thomas Piketty “Le capital au XXIe siècle”. Massachusetts Senator Elizabeth Warren made a brand-name policy of a 2% wealth tax in the 2020 Democratic presidential primaries, and fellow candidate Bernie Sanders, Senator from Vermont, proposed her own wealth tax .
Biden has never jumped on this bandwagon. But he made a key promise to raise taxes on the rich, saying that no one earning less than $ 400,000 would pay more.
Are billionaires really that rich?
Seems that way.
There is a legitimate debate on the optimal forms of taxation. Is it better for the economy for the rich to keep their assets invested in new businesses? Or is it better if some of their money goes to the government to help fund programs like child care, kindergarten and the switch to renewable energy?
What is clear is that the rich have money to tax, if the government wishes.
American billionaires have seen their collected wealth increase by 70% since the start of the pandemic to reach more than $ 5,000 billion, according to an analysis of US pro-taxes for tax fairness and the Institute for Policy Studies Program on Inequality. This gain from March 18, 2020 to last month is equal to Biden’s 10-year spending plans.
“Right now, billionaires are not paying a dime in tax on their fabulous earnings gains from their actions during the pandemic,” said Frank Clemente, executive director of Americans for Tax Fairness. “The income tax of billionaires would impose an increase in the value of these assets every year, just as workers’ wages are taxed.”
There were 614 US billionaires at the start of the pandemic, a total that has now risen to 745.
Part of what makes the coronavirus unique is that many of the poorest Americans have also gotten richer, but they have done so at a much slower pace than billionaires.
Data from the Federal Reserve shows that the net worth of the poorest 90% of Americans – a group that includes the middle class – has increased by about 22%. For many Americans, the increase in wealth reflected a rise in the stock market, higher real estate values, and unprecedented government assistance in the form of direct checks and repayable payday loans to small businesses.
Can billionaires escape tax?
They have already found ways.
They can hire armadas of lawyers, accountants and others to minimize their tax burden. Media ProPublica revealed various tax shelters with IRS data earlier this year, and recent Pandora Papers have shown that there is a global industry to protect the assets of politically powerful and extremely wealthy people.
ProPublica’s investigation showed Warren Buffett was paying an average rate of 19%. Amazon founder Jeff Bezos paid 23%, while Tesla’s Elon Musk was around 30%. The highest tax rate on labor income is 37%, but capital gains tax is less than 20% and it favors extremely wealthy people. The lower rate of capital gains can also encourage more investment in new businesses that help grow the economy.
A White House analysis in September indicated that the country’s 400 richest families paid an average federal tax rate of 8.2% between 2010 and 2018. The administration’s core message is that a rate this low is unfair because middle-class families often pay a larger share of their income in taxes.
The fundamental question for Democratic lawmakers is how to close or at least narrow the loopholes for the extremely wealthy. This might require calculations such as “deferred recovery amount” and other technical details that may confuse most of the United States. But the drafting of the tax law and its enforcement will determine how successful a wealth tax would be – and possibly the fate of Biden’s grand agenda as well.