Some Democrats recently embraced a proposal to tax the unrealized capital gains of billionaires. The move would have represented a significant change in the nation's tax policy.
Senate Finance Committee Chairman Ron Wyden, who has been working on a mark-to-market proposal since 2019, spearheaded the plan, which his party saw as a Hail Mary to get centrist Democrats to sign on to the party's sweeping climate change and social spending legislation.
In a last-ditch effort to pay for the spending package, dubbed the "Build Back Better" plan, the five-term Oregon Democrat finally released 107 pages of legislative text outlining his vision for how the country's wealthiest 700 or so billionaires would be taxed. While the proposal was meant as an alternative funding mechanism for Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, Manchin knocked it just hours after it was unveiled.
"I don't like it," Manchin said of his colleague's proposal. "I don't like the connotation that we're targeting different people as people that — basically, they contributed to society and create a lot of jobs and a lot of money and give a lot to philanthropic pursuits."
Should it have been included in the partisan spending package, the plan would have started next year and focused on those with a net worth of over $1 billion. It would have also applied to the small number of high earners who in 2019, 2020, and 2021 made more than $100 million annually.
The proposal differs from the current tax regime because gains would be taxed even if not realized. Under the current tax code, billionaires whose investments increase in value are taxed on that growth, known as capital gains, when those investments are finally sold off.
The new levy would have dramatically altered the tax system by imposing a 23.8% annual tax on all the billionaires' assets appreciated in a given year.
While the Wyden tax proposal would only apply to assets that can be traded, such as stocks, the new billionaire income tax would also target illiquid assets. Those assets, such as real estate, art, or stakes in privately held businesses, would be taxed when they get sold, and a fee similar to interest would also be applied.
The legislation would also have permitted billionaire shareholders to choose up to $1 billion in stock of a single corporation to hold as a nontradeable asset to retain a controlling interest in that company. The intent was to prevent billionaire founders of companies from selling off huge chunks of their shares to foot the new tax bill.
Under Wyden's plan, billionaires across the board would have felt a gut punch during the first year of the new tax regime because gains accrued over long periods would have been taxed.
For example, a single share of Tesla, which surpassed a $1 trillion market cap, was worth $17 during its initial price offering. That same share is now worth more than $1,000. Because Tesla founder Elon Musk, the wealthiest person on the planet, holds such a significant stake in his company, he would have been tasked with footing the most extensive tax bill during the first year of the new tax policy.
Musk would have to pay a $50 billion tax bill on his gains calculated during the first year of the scheme, while Amazon founder Jeff Bezos and Microsoft's Bill Gates would get hit with $44 billion and $19 billion bills, respectively.
Google co-founders Larry Page and Sergey Brin and Facebook's Mark Zuckerberg would be forced to pay out nearly $30 billion each. Combined, the country's 10 wealthiest people would have paid more than $275 billion as part of the new tax's launch.
The billionaires would have been allowed five years to pay those taxes.
While Democrats' plan to soak the wealthiest few hundred people has been pushed to the wayside in favor of broader increased taxes on millionaires, Wyden's billionaire tax proposal would have likely ended up in court. Some legal scholars see the proposal as an unconstitutional grab by the federal government.
Arguments about the constitutionality of the proposed levy center on Article 1, Section 2, which dictates that "direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers." However, the 16th Amendment gives Congress the authority to "lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States."
The legal challenge would conceivably focus on whether a billionaire tax is an unconstitutional federal levy on property or a form of income tax. Whether unrealized gains can be considered income is a subject of debate among scholars.
Joe Bishop-Henchman, the vice president of tax policy and litigation at the National Taxpayers Union Foundation, told the Washington Examiner that the argument in favor of the proposal would be that the new levy is part of an income tax. Because it would eventually get paid when the assets in question are sold, it would just be speeding the taxation process up.
"It's part of the income tax, and there's nothing new here, nothing big here — people paying their fair share," Bishop-Henchman said, invoking arguments that the tax is constitutional.
Bishop-Henchman said the opposing argument is that a tax on the unrealized gains of billionaires would represent a "significant shift" in the income tax system. He also cited a 1920 Supreme Court ruling that certain stock dividends aren't income and that something needs to be realized to be income.
He said that if the Supreme Court were forced to deliberate on the levy and upheld such a tax, it would have redefined what money the federal government can take, a proverbial foot in the door for future taxes.
"If it's not realized, it's not income," Bishop-Henchman said of the current situation. "And this would remove that restriction. So if it's passed and it's challenged constitutionally and it's upheld, then now the income tax has just been redefined to include this area."
Other legal and logistical challenges will likely come from the minutia of the tax and how it would ultimately be enforced.
David Sacco, a practitioner in residence at the University of New Haven's finance department, said the law opens up a host of questions and issues. He said that although the proposal is limited to liquid assets, there might be a gray area about how the legislation gets defined.
"The last 50 years or so, the tax code and tax laws have become so complicated that obviously there's this whole industry of people who do nothing but help people avoid those tax laws," he told the Washington Examiner. "So I suspect that whatever they do with passing this law, the same type of thing is going to happen. … I'm sure people are going to figure out workarounds."
After starting at a $3.5 trillion price tag, the Democratic spending package has been whittled down to about $1.75 trillion. While some Democrats on the outer flanks of the Left have condemned the fact that it is smaller, Republicans are still hitting the plan as too costly and warned that more federal spending could exacerbate too-high inflation.
Original Location: Wyden releases billionaire tax proposal after years of planning
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