How would the new billionaire income tax work?
Democrats are considering a new tax on billionaires and other very high incomes in order to pay most of the President Bidenthe signature economic spending plan.
Although Biden did not approve a tax on billionaires during the 2020 presidential campaign, he has been supporting it in recent days after another tax hike plan targeting affluent corporations and Americans earning over $ 400,000 a year hit a roadblock.
Biden has vowed that his sweeping spending proposal, which would expand the social safety net, will not add a dime to the country’s growing $ 28 trillion debt.
Here is an overview of the proposed tax:
How would that work?
The tax would target the unrealized earnings of billionaires, including stocks as well as other assets, such as real estate, bonds and art, which can become ways for the wealthy to legally store their wealth and reduce their tax obligations. (Many of the ultra-rich derive their immense wealth from the rising value of assets like stocks and property, which are not considered taxable income unless that individual sells.)
But the latest proposal, which would only apply to the top wealthiest Americans, would tax billionaires on their earnings whether or not they sold the asset – essentially changing what is considered taxable income. . Under current law, a gain is only taxed if and when the owner sells the asset.
Billionaires should pay a tax based on the difference between the value of an asset at the start of the year and at the end of the year.
For example, Amazon CEO Jeff Bezos earns a salary of around $ 80,000 per year. But over the period between 2010 and 2018, its unrealized capital gains on its Amazon shares were around $ 10 billion a year on average, according to Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities. .
In this simplified example, if Bezos didn’t sell any of his Amazon shares in a given year, the income tax would ignore the $ 10 billion gain, which means Bezos, the richest person in the world. , is effectively taxed as a middle class person. earn $ 80,000 per year. The Democrats’ plan would target this $ 10 billion gain and tax it as income.
“With the billionaire tax, policymakers, in effect, say it makes more sense – this is a more accurate assessment – to recognize capital gains income when the gain occurs (that is ie on an accrual basis) rather than on a cash basis (ie when it is sold), âMarr said.
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Individuals could claim deductions for annual losses in the value of their assets.
Who should pay?
The proposal would only affect taxpayers with over $ 1 billion in assets, or those with income over $ 100 million for three consecutive years – so 2019, 2020 and 2021 to begin with. Some critics have argued that this paves the way for more tax hikes in the future.
Anyone meeting these thresholds would remain in the alternative tax regime until their income and assets fall below the minimum for at least three consecutive years. The Bloomberg Billionaires Index estimates that Americans worth at least $ 1 billion hold more than $ 5,000 billion in wealth.
This tax affects about 700 people, or about 0.0002% of the richest Americans.
How much money would the tax generate?
House Speaker Nancy Pelosi estimated in a CNN interview on Sunday that the tax would generate between $ 200 billion and $ 250 billion in new revenue over the next decade. That’s well below the revenue of at least $ 1.5 trillion Democrats plan to spend over the next decade to boost family care, education and health care.
As a result, lawmakers are looking for other means of payment, including a global minimum tax and increased enforcement funds for the IRS.
The Joint Committee on Taxation has not published an official revenue estimate.
Will the proposal pass and become law?
It’s unclear whether the tax, which would be the first of its size and reach in an advanced economy, will be supported by all Senate Democrats and nearly all House Democrats – the threshold required for its passage.
Although he initially suggested he was open to the tax, Senator Joe Manchin, DW.Va., ceded some of that support on Wednesday. Still, he hasn’t categorically said he will vote against the measure, which is needed to fund the Democrats’ sweeping social spending plan.
“I don’t like it,” he told reporters. âI don’t like the connotation that we’re targeting different people, as people who basically have contributed to society and create a lot of jobs and a lot of money and give a lot to philanthropic activities. is time for us to come together and grow together. “
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Other Democrats have also questioned the tax, with Ways and Means House Speaker Richard Neal warning it would be difficult to implement. Neal, D-Mass., Suggested that the House Tax Raise Bill – which overturned most of the Republicans Tax Cuts and Employment Act of 2017 – was more simple and easier to adopt.
The proposal marks a significant departure from Biden’s original tax hike proposal, which largely targeted affluent corporations and Americans earning more than $ 500,000. But Sen. Kyrsten Sinema, D-Arizona, has voiced his opposition to higher corporate, personal and capital gains tax rates, saying it would do little to improve the country’s economic competitiveness or crack down on tax evaders.
Is it constitutional?
Researchers are deeply divided over the legality of such a levy, but if the tax were to become law, it would almost certainly be challenged in court.
Under Article 1, Section 2 of the Constitution, Congress has the power to impose direct taxes under the apportionment rule – essentially ensuring impartial federal treatment of states by requiring the government to levy direct taxes. in a way that results in an equal amount collected in each state.
The 16th Amendment then half replaces that by giving the government the ability to impose income tax without distribution, which means that Congress does not have to guarantee equal treatment if the direct tax is an income tax. This means that the 6-3 Supreme Court should probably determine whether the wealth tax is a direct tax on property which is therefore unconstitutional or if it is a direct tax on income and is constitutional.