How would the income tax of Democratic billionaires work?


Senate Democrats have released details of their Billionaire Income Tax proposal, or BIT, which would effectively change the way capital gains are taxed for wealthier Americans and help fund infrastructure legislation by President Joe Biden.

The changes, drafted by Senate Finance Committee Chairman Ron Wyden, D-Ore., Would apply to the roughly 700 billionaires earning more than $ 100 million in annual income for three consecutive years or who have more than a billion dollars in assets.

Currently, investors pay capital gains taxes when they sell an investment and realize a gain. Wealthy Americans often get around this problem by keeping their investments until the time of their death and passing them on to their heirs without ever paying capital gains tax on the gains.

At the same time, they use a financial strategy called asset lending, which means they borrow money from their investment portfolio to pay for their lifestyle without selling their investments. The low interest loan is not taxable or reported as income.

Among other changes, Wyden’s plan would eliminate these loopholes. Billionaires should pay taxes on gains (or deduct losses) from marketable assets, including stocks and bonds, every year whether they sell them or not.

It would not apply to assets like real estate or business interests, which would be taxed as capital gains when sold or transferred to someone else, or when the owner dies. The owners would also be charged interest.

This could mean very large tax bills for some households. In a simple example, if an affected taxpayer had $ 1 billion in marketable assets that grew to $ 2 billion over the course of a year, he would pay $ 238 million in taxes at the highest rate of 20%. on capital gains plus tax on net investment income of 3.8%. .

The first year would probably be the most important in terms of income generation. Billionaires would pay taxes on all their unrealized earnings over five years. Gabriel Zucman, associate professor of economics at the University of California at Berkeley, wrote on Twitter that the first year of implementation is akin to “a one-time 23.8% wealth tax on billionaire shares “.

He estimates that America’s 10 richest billionaires – including Elon Musk, Jeff Bezos, Bill Gates, Larry Page, Mark Zuckerberg and others – would pay $ 275 billion collectively upfront. Of course, the figure will change based on their net values, which fluctuate daily.

Wyden estimates that BIT would raise hundreds of billions of dollars. Republicans say the tax changes would hurt economic growth.

It is not clear that BIT will be successful anywhere other than on Wyden’s desk. Democratic Senators Krysten Sinema of Arizona and Joe Manchin of West Virginia have said they don’t want to raise taxes for wealthy Americans, and Democrats need the 50 senators on board to pass their legislation. In addition, the courts could declare the tax to be unconstitutional.

The ILO is also different from the wealth tax that other progressives, like Senators Elizabeth Warren, D-Mass., And Bernie Sanders, I-Vt., Have proposed. Under their wealth tax, the wealthiest Americans would pay a total annual wealth tax of 3% in excess of $ 1 billion.

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