Looking for ways to fund its spending plans, the White House is turning to a familiar target: billionaires and other super-wealthy Americans.
As part of its budget proposal for fiscal year 2023, the Biden administration is pushing a measure that seeks to ensure that those worth more than $100 million pay a federal income tax rate of at least 20% on their income, including unrealized gains on assets – which are not currently taxed.
Under the present tax code, growth in the value of assets is taxed only at the time of sale – and at lower rates than the highest income tax rates for investments held for at least a year. The rich often borrow against their holdings to build more wealth and fund their lifestyles, while avoiding adding to their annual income tax tab. And many have seen their portfolios swell in recent years as the stock market has boomed.
“Under current law, when an American worker earns a dollar of wages, that dollar is taxed as they earn it,” according to a White House fact sheet released Saturday, which notes that many wealthy people pay lower tax rates than middle-class workers. “But when a billionaire earns income because their investments increase in value, that gain is too often never taxed at all.”
Titled the “Billionaire Minimum Income Tax,” the proposal only applies to the top .01% of Americans, with more than half the revenue coming from households worth more than $1 billion. It is expected to raise $360 billion in the next decade.
The measure would allow the wealthy who are paying less than the 20% threshold to spread out the “top-up” levy on unrealized income over nine years. They would then have five years to make the top-up payments on new income going forward, which would also let them smooth out yearly variation in investment income.
The wealthy who don’t have liquid funds to cover the tax could opt to pay later with interest. And those already paying a tax rate of at least 20% on their total income, including unrealized appreciation, would not be affected.
Democrats have also restarted informal discussions on a more limited spending package with Sen. Joe Manchin, a West Virginia Democrat who effectively killed the party’s ambitious Build Back Better plan late last year by refusing to support it. Manchin has stressed the spending needs to be paid for.
Democrats’ past efforts to raise taxes on the mega-rich have floundered. Oregon Sen. Ron Wyden’s controversial billionaires income tax proposal to pay for Build Back Better withered within days amid opposition from several members of the party last fall. It would have taxed billionaires and the ultra-wealthy on the gain in value of certain assets every year, instead of when they are sold.
It’s unclear whether Biden’s latest proposal is part of the discussions on Capitol Hill and whether it would receive support from all Democrats in the Senate, which would be needed to pass a spending bill without Republican votes. Sen. Kyrsten Sinema, a Democrat from Arizona, has also balked in the past at raising taxes on the rich and corporations.
Biden has long voiced support for raising taxes on the rich. On the 2020 presidential campaign trail, he called for reversing some of the Republican-backed tax cuts for high earners and corporations that former President Donald Trump signed into law in 2017.
Since coming into office, Biden has put forward several versions of the proposal – each failing to get approval in Congress. He has not included a wealth tax, which had been a talking point of his 2020 Democratic primary rivals, Sens. Bernie Sanders and Elizabeth Warren.
Last year, Biden proposed raising the top federal tax rate from 37% to 39.6%, its pre-Trump level. He called for subjecting earnings over $400,000 to the Social Security payroll tax, which is currently limited to $147,000 of earnings.
He also called for increasing taxes on long-term capital gains on those earning more than $1 million, as well as taxing unrealized capital gains at death.
Also, he wanted to raise the corporate tax rate from 21% to 28%, but not as high as the 35% top rate that existed before the Republican tax breaks.
A version of Biden’s tax plan made it into the Build Back Better legislation, which passed the House last fall but failed to advance in the Senate after Manchin said he wouldn’t vote for it.
Under that bill, the wealthiest Americans would have paid a 5% surcharge on income above $10 million and an additional 3% levy on income above $25 million.
It would also have put in place a 15% minimum book tax on the corporate profits that large companies report to shareholders, not to the Internal Revenue Service. This would have applied to companies with more than $1 billion in profits. The legislation also included a 1% surcharge on corporate stock buybacks.
The White House budget released Monday includes two earlier corporate tax proposals – raising the tax rate to 28% and levying a 15% minimum book tax.
Though the Democrats need to fund their spending plans, Biden has repeatedly pledged that his proposals would not raise taxes on anyone earning less than $400,000 a year.
Economic models generally showed that his plans did not, in fact, directly raise taxes on most Americans – including one analysis from the bipartisan Committee for a Responsible Federal Budget and another from the Penn Wharton Budget Model.
But most economists also assume that workers would eventually bear some of the burden of an increase in the corporate tax rate. While workers would not see a higher income tax rate, their after-tax wages could be lower if the corporate tax rate is increased.