President Joe Biden wants to raise taxes on billionaires—and, for good measure, centimillionares.
In a speech in Virginia Beach Tuesday, Biden revived his long-touted goal of making the wealthiest Americans pay more.
“I want to make it clear: I'm gonna raise some taxes,” Biden said. “Many of you are billionaires out there, you're going to stop paying three percent.”
- Biden’s plan to tax the ultra-wealthy would make anyone worth $100 million pay taxes at a rate of at least 20%, no matter whether it was real income or unrealized gains.
- Some economists say the money that the federal government would make off this tax would decrease the deficit or could be spent to provide other services.
- Enacting the tax could change the way billionaires invest and narrow wealth inequality, economists say.
- Critics say the tax could backfire and hurt the economy.
Biden laid out his plan last year, when he proposed a “Billionaire Minimum Income Tax” plan aimed at addressing an absurdity of the federal income tax system: The wealthiest pay less income tax than lower-income people, according to some analyses.
The 400 richest people in America had just 8.2% of their total income taxed, a 2021 report by White House economists found. Nonprofit newsroom ProPublica, analyzing data it obtained from the IRS, estimated the 25 wealthiest paid a “true tax rate” of just 3.4%. By comparison, a teacher earning $40,000 would pay about 11.2%, according to an analysis by Americans for Progress, a progressive think tank.
You don't owe tax on the income you earn on an investment until you sell it, then you're responsible for a capital gains tax.
For example, a typical taxpayer who bought stock for $10,000 and sold it a year later for $20,000 would pay a capital gains tax of 15%, or $1,500, while a person who held onto it would retain the wealth without having to pay any taxes.
In some cases, financial assets passed on to heirs aren't taxed at all because of the “stepped-up basis” rule. A worker’s paycheck, on the other hand, is taxed consistently.
Biden’s proposal would address those untaxed assets for the first time by imposing a tax on unrealized gains. Only people with $100 million in assets or more would have to pay it, and they’d have to pay it until it brought their effective income tax rate up to 20%.
Biden couldn't get his billionaire tax through a friendly, Democrat-controlled Congress last year, and the odds of it making it through the Republican-controlled House of Representatives in 2023 are even slimmer. If political winds change in the future, and the proposal becomes law, here’s what economists say would happen:
The Federal Budget Would Get Healthier
The Biden administration says the proposal would raise $360 billion over the next decade. That would put a dent in what the Congressional Budget Office estimates to be $18.8 trillion in deficit spending over that time. That scenario sounds plausible to Owen M. Zidar, a professor of economics and public affairs at Princeton University.
The extra revenue could also be used to fund services including another Biden proposal, free universal preschool, according to Niko Lusiani, director of corporate power at the left-leaning Roosevelt Institute think tank.
Wealth Inequality Would Improve, Potentially Boosting Economic Growth
The proposal would also help narrow wealth inequality, Zidar said. As it stands, the top 1% of Americans by income control more than 30% of the nation’s wealth, according to data from the Federal Reserve.
More balanced wealth distribution would benefit the overall economy, Lusiani said.
“When you have more equality in an economy, it grows faster, and it's more shared across the economy,” Lusiani said. “When workers, low and middle-income people, have money to spend, they buy the products that corporations provide. It creates this virtuous cycle.”
That logic was borne out in a 2014 study by the Organization for Economic Co-operation and Development, which found that large gaps between lower-income households and the rest of a society tend to drag down economic growth.
Still, its impact on the broader economy might be modest, Zidar said.
The Wealthy Would Change How They Invest Their Money
The tax code penalizes people for selling their investments, creating a strong reason to hold onto them. The new law would incentivize the ultra-wealthy to move their money around more since they’d have to pay taxes on their assets either way.
“They could actually invest in new startups a little bit more agilely,” Lusiani said. “That would be good for economic growth over the medium term because you'd have more investment opportunities for startups.”
It might also bring unintended consequences.
“Wealthy people may change where they allocate their wealth, such as putting more in private business or other areas that are harder to value and tax,” Zidar said. “They may also change how much they save and invest, and a few may even move out of the United States.”
Another Theory: It Could Hurt the Economy
Not all economists say the tax would boost economic growth. The libertarian Cato institute contends that taxing the savings of the wealthy would take money away from productive uses.
“Wealth is just savings, which supports workers by providing resources for businesses investment,” tax expert Chris Edwards wrote in a post on Cato’s website in February, responding to Biden’s inclusion of the proposal in the State of the Union address. “Jeff Bezos’ wealth of $125 billion is not gold bars under his mattress, but rather mainly capital in Amazon which supports opportunities for more than a million workers. Without such wealth or capital, productivity and wages would decline.”
An Uphill Battle
Taxing unrealized capital gains would be a major departure from the current tax code and would make the U.S. an outlier among nations with advanced economies, most of which only tax capital gains upon realization.
Economists at the nonpartisan Tax Foundation criticized the proposal, pointing to potential stumbling blocks such as the difficulty of estimating the value of assets before they’re sold, and the high administrative costs to collect the new kind of tax.
But the most important obstacle may be a political one.
“Among centimillionaires, two-thirds of unrealized capital gains are in the form of private business, based on data in the Survey of Consumer Finances,” Zidar said. “Private business owners are quite influential. They are prevalent not only at the top of the income and wealth distributions but also in congress and many congressional districts.”