Dems Eye Historic Shift To Taxing Wealth, Not Just Income

It would impose a new kind of tax on billionaires.
(TPM Illustrations/Getty)

Democrats are poised to orient the country’s tax system in a whole new direction.

The move, under consideration as part of the reconciliation package, would bring a previously untouched class of wealth under federal taxation.

Not long ago, it seemed like a far-fetched progressive priority: ensuring that the unrealized capital gains of billionaires fall under the ambit of the taxman.

But now, after a meeting on Sunday, key vote Sen. Joe Manchin (D-WV) reportedly supports the measure.

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Speaker of the House Nancy Pelosi (D-CA) talked it up on CNN the same day: “We will probably have a wealth tax,” she said.

It’s widely called the billionaire tax because it primarily targets the unrealized capital gains of taxpayers with capital assets valued at north of $1 billion. (It would also hit the small pool of taxpayers who make more than $100 million in income per year for three consecutive years.)

Right now, capital gains are generally taxed only when they’re sold and the capital gain is realized.

But under the billionaire tax as proposed, unrealized capital gains would be taxed annually.

For example, if a billionaire had $5 billion in capital assets in 2022, and they rose in value to $10 billion in 2023, then that $5 billion in unrealized gains would be taxed.

Before we go any further, a few important caveats.

  • While the concept of a billionaire tax is clearly on the table and may wind up as a key funding mechanism for Biden’s signature legislation, there is no publicly released legislative text.
  • The details of the proposal are either unknown, still being negotiated, or up in the air.
  • It’s not even clear that everyone is talking about the same thing when they say “billionaire tax.”

Those caveats leave a lot more questions than answers. But the fact remains that a billionaire tax that targets unrealized gains also hits wealth (as opposed to earnings) in way that is historically significant.

Ajay Mehrotra, executive director of the American Bar Foundation and a professor at Northwestern University law school, likened the proposal in a recent interview to the tax reforms of the Progressive Era. Reacting to the excesses of that Gilded Age, Congress in the early 20th century established the income and capital gains taxes.

“The capital gains tax preference, income tax — these all go back to the teens and twenties, when our modern income tax was first created, and they made sense back then,” Mehrotra told TPM. “It’s the same analogue today. Conditions have changed, and the types of wealth have changed.” 

How Did We Get Here?

As it stands, a huge amount of capital wealth is not taxed.

Democrats, fighting to craft and pay for their reconciliation bill, have launched several attempts over the past few months aimed at taxing unrealized capital gains.

Economists Emanuel Saez and Gabriel Zucman wrote in an April essay that taxing unrealized gains could be a way for the government to reach the wealth of billionaires who, like Elon Musk, manage to reap its benefits without subjecting their assets to taxation. 

One proposal would have seen a capital gains tax be imposed on assets upon the death of the holder, but that got shot down amid a spurious campaign alleging that it would impact multi-millionaire family farm owners.

As Democrats searched for a replacement, a proposal floated by Sen. Ron Wyden (D-OR) in a 2019 white paper began to gain traction. The original Wyden proposal is different in several key elements from what is currently being pitched as the billionaire’s tax, and it’s not clear which elements of the original Wyden proposal will end up in any legislative text.

President Biden signaled support for a billionaire’s tax last month in a speech at the White House, and after Sen. Kyrsten Sinema (D-AZ) shot down a series of proposals aimed at increasing tax rates for corporations and high incomes, attention turned towards the billionaire tax.

“It taxes a component of wealth, which is fantastic and a step in the right direction and huge progress when we consider where tax policy has been for the last 50 years,” Emily DiVito, Senior Program Manager for Corporate Power at the Roosevelt Institute, told TPM last month.

How Would It Work?

The IRS would determine the value of a taxpayer’s capital assets each year, and taxpayers subject to the billionaire tax would pay tax on the unrealized gain or take a deduction on an unrealized loss.

That’s one of the places where the system could run into complexity.

The advantage of the current system is that taxing capital at the point of sale provides a convenient way to determine the price at which the asset should be taxed — the market essentially decides, determining the value. 

Under the billionaire tax, the IRS would have to decide.

“There could well be valuation questions, especially if it’s a closely held, family position, and not trading in the marketplace,” Steve Rosenthal of Urban-Brookings told TPM. “And even if it were trading in the marketplace, these billionaires have very large amounts of equity. Would you give that a blockage discount because it would be hard to sell? Or would there be a control premium, if you have a big chunk of the equity of the company because you call the shots?”

Supporters of the proposal will note that securities dealers have had to pay a similar tax on derivatives not held on the open market since 1993, and that owners of futures contracts have had to do the same since 1981. Less than 1,000 people in the U.S., the argument goes, would end up being subject to the tax — a small enough group that the increased burden on the IRS might be limited.

To Joe Thornike, director of the tax history project at Tax Analysts, the proposal’s passage would be as much about sending a message as anything else. 

“It’s a response to a general sense that rich people are enjoying large increases in their wealth through large incomes, unrealized capital increases, and people want to do something about that,” he told TPM.

Thorndike observed that, as currently construed, the billionaire tax targets an extremely narrow band of people at the very top of the income ladder. That, Thorndike said, suggests that the current Congress’ ambitions still fall behind those of their progressive forebears. 

“At the end of the day, real progressive tax reform involves taxing the upper middle class, or lower rich class,” he said. “And those are the people that Congress is still wary of spooking at this point.”

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