President Joe Biden intends to propose a new type of wealth tax as part of his upcoming budget request, a plan that’s sure to revive the debate in Washington over taxing the richest-of-the rich.
He wants to require them to pay at least 20 percent in taxes on a combination of both their income and their unrealized gains in things like their stock portfolios, something that is not currently taxed.
The administration says that would hit the top 0.01 percent of households, generating $360 billion over the next decade, with half of that coming from billionaires.
“For too long, our tax code has rewarded wealth, not work, and contributed to growing income and wealthy inequality in America,” the administration said in a summary of the proposal.
“This minimum tax would make sure the wealthiest Americans no longer pay a tax rate lower than teachers and firefighters.”
The plan comes as Democrats attempt to revive their long-stalled “reconciliation” tax plans and make good on campaign promises to hike taxes on the rich.
Subjecting people’s unrealized gains in unsold assets to taxes would amount to a major change in the tax system and open up a new revenue stream for the Treasury.
But rank-and-file Democrats have already rejected similar wealth tax proposals by Sens. Elizabeth Warren (D-Mass.) and Ron Wyden (D-Ore.).
And if enacted, the proposal would surely be challenged as a violation of an arcane restriction in the Constitution on taxation.
The plan, first reported by the Washington Post, is set to be released Monday as part of Biden’s 2023 budget request, which the administration says would reduce the budget deficit by a total of $1 trillion over the next 10 years.
The U.S. has a progressive tax system, where the bulk of taxes are paid by the well-to-do — the Treasury Department projects the top 0.1 percent of earners, making more than $2.8 million, will pay an average federal tax rate this year of 31.8 percent.
But that progressivity can fall at the very top of the income spectrum, with some able to slash or even eliminate their tax bills by doing things like borrowing against their stock holdings, which aren’t taxed unless they’re sold.
Over the past year, Democrats have repeatedly tried to address that, first with Warren’s proposal to impose a yearly tax on the total value of assets held by the super-rich. Wyden called for taxing the annual appreciation of those assets.
And Biden previously proposed ending provisions in the code known among experts as “stepped-up basis at death” that can allow wealthy people to pass assets on to heirs tax-free.
All of those failed to gain traction in Congress, with House Democrats pushing for more traditional income surtaxes on high earners.
Biden’s new proposal would require the rich to pay the difference if the taxes on what’s traditionally been considered their income and their unrealized gains is less than 20 percent.
“This approach means that the very wealthiest Americans pay taxes as they go, just like everyone else, and eliminates the inefficient sheltering of income for decades or generations,” the White House document says.
The administration would give those subject to the plan years to pay the tax bills.
“The proposal allows wealthy households to spread initial top-up payments on unrealized income over nine years, and then five years for top-up payments on new income going forward,” the administration says. “Stretching payment over multiple years will smooth year-to-year variation in investment income, while still ensuring that the wealthiest end up paying a minimum tax rate of 20 percent.”
“Illiquid taxpayers may opt to pay later with interest.”
If enacted, such a plan would likely be challenged as a violation of the Constitution’s restriction on so-called direct taxes, an antiquated term referring to levies imposed directly on someone that can’t be shifted onto someone else.
There’s an exception for income taxes, thanks to the 16th Amendment, which allows Congress to tax people’s earnings.
The administration contends unrealized gains should be considered income, building that into the proposal’s name: the Billionaire Minimum Income Tax.
In a statement, Wyden praised the plan.
“President Biden has put forward a solid proposal that would ensure billionaires pay taxes every year, just like my Billionaires Income Tax,” he said.
“There’s no way to fix our broken tax code without getting at the problem of billionaires avoiding taxes for decades, if not indefinitely.”