Jeff Bezos and Elon Musk make tempting tax targets, but President Joe Biden’s proposed “billionaire tax” is the wrong way to go after them.
It’s not just for billionaires, by the way. Biden’s budget proposes a new 20% minimum tax on the income of anyone with a net worth over $100 million. It also expands the definition of income to include unrealized capital gains, which haven’t previously been subject to taxation.
So, if Musk’s Tesla shares were to appreciate by $47 billion, as they did last year, he’d owe more than $9 billion in taxes on the paper gain. Biden’s proposal would allow those payments to be spread over five years.
The president sees this as a big new revenue source, bringing in $360 billion over a decade. It would only be paid by the wealthiest 0.01% of Americans.
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So, what’s not to like? For one thing, it’s probably unconstitutional. The Supreme Court has rejected taxes on wealth before and probably would see this as more of the same. “When you call it a billionaire tax and it’s triggered by wealth, you’re in a pretty big hole constitutionally speaking,” said Steven Rosenthal, a senior fellow at the Tax Policy Center in Washington.
For another, the new tax would create an administrative nightmare. Valuing Tesla shares is straightforward, but valuing private businesses, art collections and real estate is not. One can imagine the already-understaffed Internal Revenue Service becoming bogged down in endless disputes over the worth of ranches, Renoirs and sports franchises.
Moreover, companies might choose to stay private so the IRS can’t discover their true value. If that happens, average investors may never have a chance to invest in the next Amazon or Tesla.
“It would certainly change the calculus for firms that are possibly looking to go public,” said Michele Meckfessel, associate professor of accounting at the University of Missouri-St. Louis. “What does it do to the stability and innovation of our capital markets? We should all be concerned about that.”
Meckfessel raises another thorny issue: Asset values go down as well as up, and Biden isn’t clear about how declines would be handled. The optics could be difficult if, say, a repeat of the 2008 financial crisis leads to big tax refunds for billionaire bankers.
No other developed nation taxes paper gains as income. Several European countries abandoned their wealth taxes because of capital flight and high administrative costs, the same problems that are likely to arise with Biden’s billionaire tax.
Biden’s budget does contain a related proposal that makes sense. He proposes closing what’s sometimes called the angel-of-death loophole.
Current law taxes capital gains when an asset is sold. If the owner dies, however, the heirs never pay tax on the appreciation that happened during his or her lifetime.
Biden wants to change that. If you die with assets of more than $5 million ($10 million for a married couple), he’d tax your unrealized gains. That would be much easier than taxing rich folks’ gains annually, because their assets already would have to be appraised for estate purposes.
“I am sympathetic to the notion that a huge loophole exists that benefits the very rich,” Rosenthal said. “In my view, settling up at death is the best approach.”
It wouldn’t raise as much revenue as the so-called billionaire tax, but taxing capital gains at death would be a major step toward fairness. It also should pass constitutional muster, which is important if we want a tax that can actually be collected.