Democrats have turned away from taxing billionaires and are now looking to tax multimillionaires as a means of paying for their $1.75 trillion climate and social spending package.
Last week, the major tax proposal on Democrats’ radar was a 23.8% tax on the unrealized capital gains of billionaires, a revenue-raising measure that would have affected about 700 people and targeted the untaxed wealth of the ultra-rich rather than income. By the end of the week, that proposal was all but cast to the wayside in favor of a broader surtax on income that would affect thousands.
The White House proposed a 5% surtax on income above $10 million and an additional 3% surtax on individuals who are earning more than $25 million annually. The plan also intends to close “loopholes” that allow some wealthy people to avoid paying a 3.8% Medicare surtax on their earnings, the administration said on Thursday.
“It’s definitely a broader group of folks that will be subject to these tax changes,” Garrett Watson, senior policy analyst at the Tax Foundation, told the Washington Examiner. He said that while the billionaire proposal would have affected just a few hundred individuals, the millionaire proposal targets upper earners and will hit somewhere in the range of 25,000 people.
The change, of course, is a sharp departure from the billionaire tax, which was proposed by Sen. Ron Wyden of Oregon. That tax would have collected enormous sums of money from people, such as Tesla founder Elon Musk and Amazon’s Jeff Bezos, who have amassed enormous wealth. But under the new proposal, they would pay substantially less because, while they are worth billions of dollars, their value is stored in company stock and illiquid assets like art and real estate — not derived from huge annual income streams.
For example, under Wyden’s billionaire tax, Bezos would have had to pay $44 billion the first effective year of the tax because of the enormous amount of appreciation that Amazon’s stock has seen since it went public, according to Gabriel Zucman, an economist who has advised Democratic Sen. Elizabeth Warren of Massachusetts on wealth taxes.
Bezos would end up paying considerably less with the surtax proposal. According to Internal Revenue Service documents leaked to ProPublica, while Bezos's wealth grew by nearly $100 billion from 2014 to 2018, a small percentage of that wealth was derived from actual income, meaning he would end up paying far less in taxes as a percentage of net worth increase under the millionaire tax proposal. Bezos’s official salary from Amazon alone is just a meager $81,000.
While people like Bezos have their wealth largely tied up, the surtax on those earning above $10 and $25 million will have a far greater proportional effect on those like artists, entertainers, and athletes, who earn much of their wealth from their gross income rather than earnings on investments.
NBA star LeBron James is expected to make $95.4 million this year, some $64 million of which will come from endorsements, memorabilia, and other deals, according to Forbes. That income would be calculated alongside his NBA salary in determining his tax bill.
The tax would apply to a broad base. “For the surtax, it will actually be applied on higher earners' AGI, so it’s before they deduct all their itemized deductions, all of their charitable contributions, SALT deductions, medical deductions — any other itemized deduction, those effectively will not count when you’re looking at this tax,” Watson said.
In terms of revenue generation, the billionaire tax would amount to an enormous windfall for the U.S. government the first year it is enacted. The main uncertainty with taxing billionaires’ unrealized gains is what the market looks like in the next decade. If the economy turns south or dips into a recession, stock prices might decline and billionaires could end up reporting losses.
Arguments for and against a billionaire tax are varied. Many on the Left assert that billionaires should be taxed more because of their outsize wealth and influence, as well as their ability to avoid paying taxes on business income and capital gains through complicated tax maneuvering. In particular, many Democrats favor taxing unrealized gains on the basis that billionaires are able to borrow on unrealized gains to consume without paying taxes, or, in some cases, pass the gains on to heirs untaxed.
On the other hand, the logistics of taxing unrealized gains are complicated.
“It all comes down to the question of should unrealized gains be taxed,” Watson said. “The folks who like this approach better would say that it’s easier to tax income that has been realized, where there is a clear value associated with that income, there is clear liquidity there, it’s consistent with how we’ve treated capital gains in the past and in the other parts of our tax code.”
Other tax measures that would have targeted wealth and assets rather than income have also been nixed from the package’s framework. The final agreement isn’t likely to include proposals to lower the estate tax exemption or plans to limit certain transfers to trusts, the Wall Street Journal reported , citing people with knowledge of the ongoing negotiations. Tax code changes related to carried interest , a kind of taxable income generally earned by private equity managers that is subject to a lower rate, are also likely to be out of the final deal.
The tax measures included in the Build Back Better framework include a 15% country-by-country minimum tax on the foreign earnings of U.S. corporations, which Sen. Kyrsten Sinema of Arizona, a must-have vote, has reportedly been amenable to. The framework also looks to apply a 1% surcharge on corporate stock buybacks.
The most recent iteration of the framework’s revenue-raising measures is a far cry from what the Biden administration had originally proposed.
Biden had sought to raise the corporate tax rate from 21% to 28% and increase the top marginal tax rate on individuals making over $400,000 per year to 39.6%, up from the current 37% rate.
The White House also looked to nearly double the capital gains rate for the highest earners from 20% to a new level of 39.6%. Those earning more than $1 million would have faced a federal rate of up to 43.4% when an existing Obamacare surtax on investment income is included.
Democrats can’t afford to lose a single vote, and Sinema and Sen. Joe Manchin of West Virginia have consistently pushed back on party leadership’s ambitious plans for a more fulsome overhaul of the country’s tax code and social infrastructure.
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