Minimum tax: How would Biden’s ‘billionaire minimum income tax’ work?

President Biden said on Monday that he wanted to introduce a new tax levied on America’s richest families The idea is to ensure that the wealthiest Americans “pay their fair share”, he said – an issue that has become all the more urgent in recent years given the the wealth gap in the United States is about as wide like a century ago in the golden age.

According to the proposal, the new tax – dubbed the “Billionaire’s Minimum Income Tax” – would apply to the roughly 20,000 families in the United States with assets of more than $100 million. These households would be subject to a new minimum tax of 20%ensuring they don’t pay lower tax rates than many low- and middle-income Americans.

Although the US tax system is designed to be progressive, with the wealthiest citizens paying a greater share of their income than everyone else, some economic research has shown that the 400 wealthiest families pay a lower tax rate than the middle class. This is due to four decades of tax cuts for the wealthy, as well as the preferential treatment of capital gains, such as profits from the sale of stocks and bonds, which are taxed at a lower rate than that of income.

The new tax would work by targeting “unrealized gains” or potential profits that exist on paper because the underlying asset has not yet been sold. Under the current tax code, gains are only taxed if realized, such as when you sell a stock and make a profit.

Democrats consider billionaires’ income tax to help pay spending bill


“The poll is good for any tax that can be called a ‘billionaire tax’ – people think, ‘It’s somebody else, and they should be contributing more,'” said Steve Rosenthal, senior researcher at Tax. Policy Center. “And the ‘hundred millionaires’ probably aren’t too nice as a class either.”

The proposal suggests the tax code should include unrealized gains when considering average tax rates, said Garrett Watson, senior policy analyst at the Tax Foundation. “And that there should be a minimum floor when you look at unrealized gains – and the minimum is 20%.”

Here’s what we know so far about the tax and how it works:

Who would pay the minimum income tax for billionaires?

Although the proposal is being called a tax on billionaires, most of the families that would be affected are actually multi-millionaires.

“The most important thing about the billionaire minimum income tax is that it really doesn’t apply to billionaires, it’s not a minimum tax and it’s not on income,” noted Rosenthal wryly.

There are approximately 20,000 families in the United States with assets of more than $100 million, according to the Credit Suisse Global Wealth Databook 2021. The tax would also affect the country’s approximately 700 billionaires, such as Jeff Bezos, Warren Buffett, Bill Gates and Elon Musk. .

Each year, about 160 million families file tax returns with the IRS, which means that this tax would affect about 0.01% of all Americans.

How much money would the tax bring in?

The Biden administration projects the tax would raise $361 billion over 10 years.

Biden’s proposed budget projects that new revenue from sources such as the wealth tax would lead to lower federal deficits, more money for police and increased funding for education, public health and housing.

Hasn’t this already been suggested?

If that sounds familiar, that’s because Democratic lawmakers have issued similar proposals in recent years.

Last fall, for example, Senate Finance Committee Chairman Ron Wyden of Oregon unveiled its billionaire income tax. Under his plan, tradable assets such as stocks would be valued annually. Billionaires would be taxed on their earnings during this period – whether they sold the asset or not.

These ideas were floated in order to pay for Mr. Biden’s national spending plans, such as the Build Back Better Act. But those spending plans were put on hold after talks with Democratic West Virginia Sen. Joe Manchin broke down.

How would the billionaire minimum income tax actually work?

Basically, families worth at least $100 million would be assessed on whether they pay a tax rate of at least 20% on their total income, which the Biden administration says would include the unrealized appreciation of assets.

Rosenthal noted that the plan isn’t really a tax in the conventional sense, in which a portion of your annual income goes to the IRS. According to the Treasury Department, the payments would be treated as an advance payment that would be deducted from taxes paid at a later date on unrealized capital gains; in other words, these wealthy families would not be taxed twice because the tax would act as an advance on future capital gains taxes triggered when they sell stocks or other assets.

This is an important point, Rosenthal noted, because it fixes what he calls “one of the big loopholes” in the tax system: Unrealized gains are not taxed when heirs inherit assets, which allows to benefit from the so-called “step-up in the base layout. With this, the base price of an asset is reset to its value upon inheritance, which is often higher.

Think of a woman who buys stock in Apple at $1 a share and holds it until she dies. When his heirs inherit the stock, the new basis is Apple’s current price, currently around $175 per share. If they sell the stock immediately, the heirs pay taxes on any profit they make beyond the $175 price per share, not the $1 price paid by the woman who bought the stock years earlier.

“Unrealized gains held at death are not taxed when passed on to beneficiaries — they take their tax base at fair market value,” Rosenthal said. “Entrepreneurs like Bezos and Musk were able to amass great fortunes in the stocks of the companies they founded and grew.”

He added, “If they hold this to death, all that unrealized appreciation goes away. And that’s not right.”

What obstacles does the proposed tax face?

There are many questions about whether the tax could be enacted, experts say. For one, he’s unlikely to win support from Republican lawmakers, and it’s unclear whether moderate Democrats would back the idea, they noted.

Second, any bill would likely be challenged in court for its constitutionality.

“It’s a pretty unexplored area,” Rosenthal said.

With Associated Press reporting.

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