Biden's Billionaire Tax Would Affect Everyone

Wealth is not held in the manner in which people believe.

One of the most critical truths of tax policy is that the person who receives the bill and writes the check to the taxman does not often bear the entire cost—or even the majority of the expense. A tax may first target a few wealthy people directly, but it is never limited to them. Consider the rationale and marketing behind the White House's unique "billionaire tax" proposal for fiscal year 2023.

As currently written, it would levy a wealth tax on some appreciated assets held by households with more than $100 million in assets. This would set a new standard for regressive taxation by compelling wealthy households to pay at least 20%—comprising both ordinary income taxes and, in the future, unrealized profits on held liquid assets.

Garrett Watson and Erica York of the Tax Foundation explain how this would work:

Consider a household with net wealth of $200 million, $5 million in ordinary income, $10 million in accumulated unrealized capital gains from a privately held company, and an ordinary tax liability of $1.8 million in 2023….When including unrealized capital gains as income, the household's effective tax rate is 12 percent, below the proposed 20 percent minimum. To increase their effective tax rate to 20 percent, the household must remit an additional $1.2 million in tax ($3 million in taxes paid with a $15 million income inclusive of unrealized gains).

That is stiff, but let us concentrate on everyone else. President Joe Biden's administration assures us that we, the non-billionaires and millionaires, would not pay a dime of this tax because it would be levied on the top 0.01 percent of families, with billionaires writing half of the checks. Wishful thinking.

There are numerous issues with this tax. For example, as Sen. Joe Manchin (D–W.Va.) pointed out to the president, it is questionable whether taxing wealth rather than income would not raise constitutional concerns. Additionally, as previous wealth taxes have demonstrated, it will be administratively prohibitive. This is why the majority of European countries that once imposed wealth taxes eventually repealed them.

Additionally, it would almost certainly generate very little revenue. This is precisely because capital is mobile and would quickly flee to more permissive countries in order to avoid the tax. Alternatively, the owners of the aforementioned properties could be compelled to sell—often to foreigners—thereby reducing tax revenue.

More crucially for the sake of this piece, it would result in a decline in US saving and capital formation, which would have ramifications for everyone else who is not a billionaire. The wealth of billionaires is not held in the manner in which the majority assume it is—under their beds, as if in gold or cash. Because they invest heavily in their own businesses, wealth taxes ultimately affect their employees.

Similarly, billionaires' wealth represents a portion of the cash that is provided to smaller businesses, new entrepreneurs, and other job creators. This is another way in which the wealth tax would disproportionately harm non-billionaires.

Finally, as my Mercatus Center colleague Thomas Hoenig recently noted in a Barron's magazine piece about why a billionaire tax should worry the middle class, if such a proposal were implemented, it would very likely be expanded to apply to more and more Americans. He cites the example of the income tax, which Congress passed in 1913 and "topped out at 7% for income above $500,000." $500,000 in 1913 would be over $14 million today. Now, the top tax rate is at 37 percent for income above $539,900.

 

The same is true of the 1969 alternative minimum tax (AMT). Then, the tax literally applied to only a few super-wealthy taxpayers who were accused of dodging taxes. However, over time, Hoenig explains:

With price and wage inflation, the number of households subject to the AMT increased from 200,000 in 1982 to 5.2 million in 2017, although their real income remained relatively unchanged. The tax was adjusted down in 2018, but only temporarily, and the middle class will again carry a heavier tax burden after 2025.

The bottom line is to be careful what you wish for, because this supposed billionaire tax may inadvertently tax you, too.

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