Biden’s poposed ‘wealth tax’ and how it would work
TO HELP pay for his big economic and social agenda, President of the United States 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 his more conventional proposed rate increases on the income of large corporations and the wealthiest Americans have hit a roadblock.
That leaves a special tax on the assets, not the income, of billionaires being proposed by a Senate Democrat as a possible way to help pay for childcare, universal pre-kindergarten, child tax credits, family leave, and environmental initiatives.
Biden has pledged that his programmes will not add a penny to the deficit, which means selling to Congress and voters a tax on the wealthiest .0005 per cent of Americans.
Essentially, billionaires earn 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. A triceratops skeleton.
This new tax would apply solely to people with at least US$1 billion in assets or US$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 by the chairman of the Senate Finance Committee, Senator Ron Wyden, D-Oregon.
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 they are sold.
Billionaires would also face an additional tax on non-tradeable assets, such as real estate and business interests, once those assets are sold. During the first year of the proposed tax, the billionaires would also owe taxes on any built-in gains that predate the tax.
New revenue
House Speaker Nancy Pelosi, D-California, estimated on ‘CNN Sunday’ that the tax would raise US$200 billion to US$250 billion. This is a meaningful sum, but it’s well shy of the nearly US$2 trillion in proposed additional spending over 10 years being negotiated right now. This means that additional levies such as the global minimum tax and increased enforcement dollars for the Internal Revenue Service, IRS, would still 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.”
Biden would rather raise corporate tax rates and rates on wealthy individuals. That was his initial proposal, but he’s got to appease Senators Joe Manchin, D-West Virginia, and Kyrsten Sinema, D-Arizona. Those are the two make-or-break Democratic votes in the evenly split US 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. Senator Elizabeth Warren, D-Massachusetts, made a 2.0 per cent wealth tax a trademark policy in the 2020 presidential primaries, and fellow candidate Bernie Sanders, the senator from Vermont, proposed his own wealth tax.
Biden never jumped on that bandwagon. But he did make higher taxes on the wealthy a key promise, saying no one earning less than US$400,000 would pay more.
Court challenge possible
If a wealth tax were to become law, it probably would be challenged in court.
The likely case comes from
There were 614 US billionaires at the start of the pandemic; the total has now grown to 745
Article 1, Section 2 of t he Constitution. It states that “direct taxes shall be apportioned among the several states which may be included within this union, according to their respective numbers”. What does that mean? It means that revenues from “direct” taxes must reflect the population of the states, which is a problem because billionaires tend to cluster in places such as
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. It 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 that is unconstitutional, or whether it’s essentially a tax on income that is permissible.
There is a legitimate debate about the optimal forms of taxation. Is it better for the economy for the wealthy to keep their assets invested in new businesses? Or is it better for some of their money to go to the government to help pay for programmes such as childcare, universal pre-kindergarten and shifts to renewable energy?
What is clear is that the wealthy do have money to tax, should the government wish to do it.
Surge in riches
America’s billionaires have seen their collected wealth surge 70 per cent since the start of the pandemic to more than US$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.
“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.”
There were 614 US billionaires at the start of the pandemic; the total has now grown to 745.
Part of what makes the coronavirus unique is that many poorer Americans also became wealthier, but they did so at a much slower pace than billionaires.
Federal Reserve data indicate that the net worth of the bottom 90 per cent of Americans — a group that includes the middle class — rose by roughly 22 per cent. For many Americans, the wealth increase reflected a rising stock market, higher home values, and unprecedented government aid in the form of direct cheques and forgivable payroll loans to small businesses.
Escaping taxation
Can billionaires escape taxation? They’ve found ways before.
They can hire armadas of lawyers, accountants and others to minimise their tax burdens. The news outlet ProPublica revealed various tax shelters with I RS 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 per cent. Amazon founder Jeff Bezos paid 23 per cent, while Tesla’s Elon Musk was at roughly 30 per cent. The top tax rate on income earned from labour is 37 per cent, but the tax on capital gains is a lower 20 per cent and that favours 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 per cent 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.
The bottom-line question for Democratic lawmakers is how to close, or at least narrow the escape hatches for those with extreme wealth. It could require calculations such as the ‘deferral recapture amount’ and other technicalities that are likely to baffle most of America.
But the writing of the tax law and its enforcement will determine just how successful a wealth tax would be — and perhaps the fate of Biden’s big agenda as well.