The White House on Monday unveiled a new “billionaire tax” as part of its $5.8 billion budget proposal, as it seeks to offset spending increases in areas including defense and communications. social care without raising taxes on ordinary Americans.
This is the first time Joe Biden has offered a detailed policy to impose a wealth tax on the wealthiest Americans. The US president has previously avoided targeting billionaires directly, instead pushing for higher capital gains and business taxes.
The low effective tax rate on the ultra-wealthy has long been a political pressure point in the United States. In a document outlining the new tax, the White House estimated that US billionaires only pay 8% of their total income in taxes, while a firefighter or teacher pays twice that rate.
Yet previous efforts to raise the tax rate on US billionaires have failed, and similar wealth taxes pushed by progressive Democrats have stalled in Congress, which must pass the president’s budget.
So how will Biden’s new tax proposal work?
What is the “billionaire tax”?
Although the new tax has been dubbed the “Billionaire Minimum Income Tax,” it will hit all U.S. households worth more than $100 million with a new 20% minimum tax on all of their income, including on unrealized investments.
Many of the wealthiest people in the United States are currently able to pay lower tax rates than the average American because the value of their investments is not taxed until they are sold. . However, they are able to borrow against their assets, often at relatively low interest rates, without triggering capital gains tax.
This type of borrowing has been on the rise for more than a decade, but the pace has picked up since the Federal Reserve cut interest rates in response to the pandemic.
For example, at JPMorgan Chase, the largest U.S. bank by assets, its asset and wealth management division’s lending totaled $282 billion at the end of 2021. That figure was up 42% on a year, far exceeding the bank’s 6% growth in assets. overall loan portfolio last year.
For borrowers, such loans are not without risk. In one case, several Peloton executives had borrowed heavily against their shares in the fitness company, allowing them to cash in on some of the 2020 stock price gains without incurring a hefty tax bill. However, they were then hit by margin calls to post more collateral when the share price fell, the Financial Times reported last month.
The new policy will attempt to assess both tradable assets such as stocks and non-tradable and illiquid assets such as private businesses or expensive works of art, in order to calculate the tax.
Garrett Watson, senior policy analyst at the Tax Foundation, said the difference in treatment between the two could lead to non-marketable assets being taxed at a lower rate than marketable assets due to the complexity of the calculations involved. .
How many people would be affected?
The new tax will not apply to the overwhelming majority of US citizens. The White House estimates that only about 0.01% of US households will be affected by the tax and predicts that more than half of those affected will be billionaires.
The rate would also only apply to taxpayers who are not already paying at least 20% of their unrealized income and gains. Anyone currently paying below this level would have to pay a top-up rate to reach a minimum of 20%.
How much money would that make?
The White House estimates the tax would raise about $360 billion over the next decade, which would help pay for other priorities in Biden’s spending bill, such as measures to reduce the cost prescription drugs and to provide additional funds for police and law enforcement.
Gabriel Zucman, an economist at the University of California at Berkeley, estimated that the top 10 US billionaires would end up paying at least $215 billion in total taxes over the next decade if the rule goes into effect.
Will the proposal pass Congress?
Senate Democrats tried to pass similar versions of the bill last October, but failed to pass them after a backlash from some moderate senators, including Arizona’s Kyrsten Sinema. .
Democratic Sen. Joe Manchin, who holds a key vote in the Senate, has already indicated he does not support the proposals and called the idea of a wealth tax on unrealized gains “difficult”. “There are other ways for people to pay their fair share,” Manchin said.
Ron Wyden, the Democratic chairman of the powerful Senate Finance Committee, sponsored a billionaires’ income tax last year that would have taxed billionaires’ unrealized earnings on an annual basis. On Monday, Wyden backed Biden’s proposal.
“There’s no way to fix our broken tax code without tackling the problem of billionaires avoiding taxes for decades, if not indefinitely,” he said.
But Biden will likely need a two-thirds majority to push the measure through the Senate 50-50, which would require support from some Republicans, as well as the entire Democratic caucus.
Beacon Research, a policy analysis consultancy, said measures to raise taxes on the wealthy were unlikely to pass Congress and that a presidential budget should be seen more as a “policy tool.” messaging” only as a policy.
“Taxing the rich and rich is always good sounding, so there’s little downside to playing the populist ‘Scranton Joe’ in a budget,” he said in a note. “But as we’ve seen time and time again, there doesn’t seem to be political capital or strength to push such proposals through Congress.”