Last year, ProPublica, drawing on a wealth of IRS data, gave the public its most comprehensive view ever into the taxes of the wealthiest Americans. The first article in the Secret IRS Files series put hard numbers on a basic truth about the US tax system: Billionaires like Jeff Bezos, Elon Musk and Warren Buffett can easily protect their wealth from tax by avoiding the types of income entered on a tax return. .
A proposal released today by the Biden administration directly targets this issue. The policy, if adopted, would close this escape route for some of the wealthiest. Vast increases in wealth would result in taxes being owed.
Generally, the IRS does not tax gains unless they are “realized,” usually when someone sells a stock that has gone up in value. Billionaires who hold on to assets that have appreciated benefit from those unrealized gains – they often borrow against them – tax-free.
This is by no means a new bug in the US system. But as ProPublica explained last year, the explosion of wealth inequality in recent decades, coupled with the peculiar nature of how these new fortunes have been built, has made the unrealized gains particularly important to this stage of our history.
Past US presidents have, on occasion, pushed to raise taxes on the wealthy, but usually by raising traditional tax rates. Biden’s proposal calls for a paradigm shift: It would change what counts as income. “Although the taxation of unrealized gains is still a long way from being enacted, and even if it were to await an uncertain fate in the Supreme Court, the presidential endorsement of the concept is a milestone in the history of the tax. on income,” said Lawrence Zelenak, a Duke Professor in the University’s School of Law whose expertise includes income and corporate tax and tax policy.
As the White House pointed out, the new tax would only apply to households worth more than $100 million. They would be liable for a tax of at least 20% on their “full income”, as the White House document terms, a definition that includes unrealized gains. News of the proposal, which was part of Biden’s 2023 budget plan, was first reported by The Washington Post.
Under the current system, the wealthiest Americans pay far from that tax rate on the earnings of their wealth. The 25 richest Americans, according to Forbes, grew richer by $401 billion between 2014 and 2018. ProPublica’s analysis of IRS data found the group paid a total of $13.6 billion in federal income taxes during this period, a rate of only 3.4%.
In analysis posted on Twitter, University of California, Berkeley economist Gabriel Zucman estimated that the 10 richest Americans alone would owe at least $215 billion under the plan.
In total, the Biden administration estimates, the new tax would generate $360 billion in additional revenue over 10 years.
The plan would give those affected by the tax a nine-year period to pay their “initial” obligations: In other words, someone whose fortune grew by $10 billion by the time the bill became law would have that time to pay the $2 billion they owe. Going forward, further increases in wealth would result in taxes being due over a period of five years.
Although Biden’s Billionaire Minimum Income Tax, as it is called, is a major departure from past presidential proposals, it would roll out features that are already part of current tax law.
For example, there is the Alternative Minimum Tax, a measure first adopted decades ago in response to revelations that the wealthiest were easily avoiding paying income taxes. The AMT is supposed to work as a kind of fail-safe, imposing taxes on the wealthy who have used huge deductions to erase their income for tax purposes and thus avoid taxes. But this often fails. For example, we found several examples of billionaires not paying a penny in income tax, sometimes for years at a time.
Like the AMT, Biden’s minimum tax would operate alongside the current tax code. If a billionaire was already paying 20% of their total income, the Biden plan would incur no additional taxes.
The current tax code also contains provisions that tax unrealized capital gains in certain situations. For example, professionals who trade in securities, such as hedge fund managers, often choose to have their portfolios marked-to-market and have to pay taxes based on their gains or losses from the previous year. Likewise, another layout hits wealthy Americans who choose to renounce their citizenship: all their assets are valued and taxed as if they had been sold.
Versions of a tax on gains at market price have already been proposed, goes back several yearsespecially last year by Sen. Ron Wyden, D-Ore., Chairman of the Senate Finance Committee. The idea, however, has its share of critics, both Republicans and tax experts who worry it would be too complicated to administer and risk being struck down by the Supreme Court.
John Brooks of the Georgetown University Law Center is among the supporters. He argued that the idea is squarely constitutional, given “the many examples of taxing unrealized gains already in the tax code.” And regarding complaints about its complexity, the wealthy are already valuing their assets for their own financial ends, he told ProPublica: “Ultimately, it would be a simple, formulaic approach that would require minimal work. on top of what wealthy taxpayers already are. Make.”