According to reports, President Biden is going to re-propose a billionaire minimum tax at his 2023 State of the Union address on Tuesday. What is this tax proposal?
What is the billionaire minimum tax proposal?
Some version of a billionaire minimum tax proposal has been part of President Biden’s agenda since he took office. President Biden included in his April 2022 Green Book of revenue proposals a 20-percent minimum tax on the income and unrealized capital gains of taxpayers with wealth greater than $100 million.
This tax proposal is neither a “billionaire” tax nor an income tax. First, though taxpayers with wealth (measured by “subtracting liabilities from assets”) of $100 million or more are among the richest people or households in the world, they are not, by definition, exclusively billionaires.
Second, taxing unrealized capital gains is not the same as taxing income. Previous proposals in this vein have been championed by Senate Finance Committee Chair Ron Wyden (D-OR), the top tax-writing Democrat in the Senate. Chair Wyden has proposed a “mark-to-market” tax system that would require the federal government to tax the value of certain assets, including stock holdings, on an annual basis, even if the taxpayer does not sell those assets and realize income in a given year.
Former NTU Foundation Vice President Nicole Kaeding wrote in 2019 that Wyden’s “mark-to-market” proposal:
“...would be difficult to implement given challenges related to valuations, exemptions, transition rules, and treatment of losses, among other matters. The issues identified in this paper make it difficult, if not impossible, to imagine the creation of an administrable and fully functional mark-to-market tax system.”
Similar critiques apply to President Biden’s billionaire minimum tax proposal.
How would the billionaire minimum tax work?
According to President Biden’s Treasury Department:
“A taxpayer’s minimum tax liability would equal the minimum tax rate (that is, 20 percent) times the sum of taxable income and unrealized gains (including on ordinary assets) of the taxpayer, less the sum of the taxpayer’s unrefunded, uncredited prepayments and regular tax. Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once.”
However, the Internal Revenue Service (IRS) doesn’t currently collect data on how much wealth a particular taxpayer has accrued in total. Implementing this billionaire minimum tax would require a complex reporting regime, outlined in part by Treasury last April:
“Taxpayers with wealth greater than the threshold would be required to report to the IRS on an annual basis, separately by asset class, the total basis and total estimated value (as of December 31 of the taxable year) of their assets in each specified asset class, and the total amount of their liabilities. Tradable assets (for example, publicly traded stock) would be valued using end-of-year market prices. Taxpayers would not have to obtain annual, market valuations of non-tradable assets. Instead, non-tradable assets would be valued using the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing, or financial statements, or other methods approved by the Secretary or her delegates (Secretary). Valuations of non-tradable assets would not be required annually and would instead increase by a conservative floating annual return (the five-year Treasury rate plus two percentage points) in between valuations. The IRS may offer avenues for taxpayers to appeal valuations, such as through appraisal.”
Such a process would therefore involve enormous implementation challenges, especially as to assessed value and tax liability assigned to non-tradeable assets.
As Kaeding explained in 2019:
“Ownership of private businesses, artwork, yachts, and other luxuries, among other assets, are difficult to appraise. These assets may have limited markets for them, or no markets at all, making valuation a guessing game. In such a scenario, naturally the incentive for a taxpayer will be to minimize the value of such assets while the incentive for revenue officials will be to maximize the value, setting up a highly-adversarial relationship that could lead to administrative difficulties from lack of independently-verifiable comparisons.”
How much would the billionaire minimum tax raise?
The Biden administration estimated in April 2022 that a billionaire minimum tax would raise $361 billion over ten years from fiscal years 2024 through 2032:
Of the dozens of tax increase proposals President Biden made in 2022, this was the second-largest one in terms of its total revenue yield over 10 years. Only raising the corporate income tax rate from 21 percent to 28 percent (+$1.315 trillion over 10 years) would have raised more revenue over 10 years.
The billionaire minimum tax estimate should be viewed with a dose of skepticism, though. Many of the high-wealth individuals targeted by this tax have resources to a) shift resources outside of the taxable base (either by moving from taxable assets to non-taxable assets, or moving them out of the country entirely) and b) challenge IRS asset valuations in court and in alternative fora. France abandoned a similar tax after facing such challenges. No U.S. state has adopted such a tax either.
When would the billionaire minimum tax go into effect?
When President Biden proposed the billionaire minimum tax in April 2022, he proposed having the tax go into effect on January 1, 2023. As of this writing, we assume President Biden’s reproposed billionaire minimum tax to go into effect on January 1, 2024.
Implementing the billionaire minimum tax would require an act of Congress. It is highly unlikely that Congress will enact such a proposal in the next two years, since Republicans control the U.S. House of Representatives and are highly likely to disagree with such a proposal.