So much for President Biden’s shift to the political center. The fiscal 2023 budget he unveiled Monday reproposes most of the bad ideas that didn’t pass Congress and adds a new one — a wealth tax he declined to support as a candidate in 2020. In economics, he swings further to the left – presumably to cheer on dour progressives in November.
The White House is proposing a new “billionaire minimum income tax,” which the Federal Trade Commission would call false advertising if a private company attempted that description. The tax is not limited to billionaires and applies to more than income.
It’s a new tax for Americans with wealth of $100 million or more whose effective tax rate is less than 20% of their income in any year. But those taxpayers are already paying a tax rate of 23.8% on capital gains and 37% on ordinary income. The average tax rate for the top 1% of taxpayers was 25.6% in 2019.
Here’s the Biden trick: The 20% minimum tax rate would apply to both ordinary income and asset appreciation in a given year. This means that unrealized capital gains will be taxed that are currently not taxed until assets are sold and income is actually realised. In other words, this is a new wealth tax – albeit structured differently than Elizabeth Warren and Bernie Sanders proposed. The White House is redefining wealth as income.
Some details of the plan aren’t fleshed out, but target individuals appear to have nine years to pay the 20 percent tax on the growth of their wealth from the first day they accumulate it. In the future, they would have five years to pay tax on their annual unrealized capital gains.
It’s not clear whether losses in future years will be allowed to offset annual gains. So a taxpayer might have to pay a tax of, say, $2 million on a $10 million unrealized gain in 2022. But if the asset declined by the same $10 million the next year, bad luck. The government would win whether financial and other assets rise or fall.
Taxpayers would have to report their assets to the IRS annually. Non-tradable assets such as an interest in a private company would be valued at the last valuation event and increased annually by the Treasury Department’s five-year rate plus two percentage points or “other methods approved by the Treasury Secretary”.
The White House proposal would greatly complicate tax law and create huge investment distortions. “Illiquid” taxpayers — defined as those whose tradable assets make up less than 20% of their wealth — could defer payments pending their sale and pay interest. Investors would thus have an incentive to pile into illiquid assets like real estate to avoid stocks being regularly liquidated to pay taxes. Instead of selling stocks to invest in other ventures, investors may need to sell stocks they would rather own to pay taxes on unrealized capital gains.
Progressives claim that the tax will free up capital by discouraging the wealthy from owning stocks over time. But if liberals want to encourage capital to flow more freely, they should set the rate of return to zero. Some countries do that. And hasn’t the Left complained about the “short-termism” of investors for years?
Another disingenuous argument is that taxing only realized gains reduces the tax base and requires higher income tax rates. But the administration is not proposing to lower tax rates. Their budget calls for an increase in the corporate tax rate from 21% to 28% and the top individual tax rate to 39.6%. The wealth tax is envisioned as an entirely new and additional revenue stream that would bring in nearly $360 billion over 10 years.
The government says the tax would only apply to the top 0.1% – that is, hundreds of successful entrepreneurs and small business owners who have accumulated wealth through decades of innovation and hard work. But these new taxes always apply first to a few and then spread to millions.
The 1913 income tax provided a top rate of 7% for taxpayers earning more than $500,000 ($14.5 million today). The Alternative Minimum Tax was introduced in 1969 as a flat 10% tax on the super-rich, but grew to tens of millions in the middle class.
This all assumes that the wealth tax would pass the courts. The Constitution states that Congress may levy “direct taxes” only when they are apportioned among states according to their population. The Sixteenth Amendment allows Congress to tax income, but unrealized capital gains are not income, nor are vested stock options.
A tax increase of this magnitude is never desirable, but the timing is particularly bad. The Federal Reserve is raising interest rates to counter inflation, and the bond market yield curve is about to invert, which can sometimes herald a recession. Democrats already own inflation politically. If they push through a gigantic tax hike now, they will bear all the economic damage.
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Appeared in the print edition of March 29, 2022.
https://www.wsj.com/articles/joe-bidens-big-new-wealth-tax-white-house-budget-fy-2023-11648504962 Biden’s big new wealth tax