President Joe Biden gives a speech on Oct. 25 in Kearny, N.J. Michael M. Santiago/Getty Images
“Don’t tax you, don’t tax me, tax that fellow behind the tree.” That quote is attributed to the late Russell Long, the influential Louisiana Democrat who headed the Senate Finance Committee from 1966 to 1981.
Now, however, the intended targets no longer are hidden behind the tree trunks. They are the billionaires who pay little or no taxes despite their otherworldly wealth who were exposed by ProPublica earlier this year.
At the same time, taxpayers in high-tax states are highly visible and may get a coveted tax break restored. That’s all part of the seemingly endless tug of war to get President Joe Biden’s key legislative agenda of infrastructure and social programs passed by a Democratic Congress with a slim majority that can’t afford any defections.
According to various media reports, among the tax measures proposed in the so-called reconciliation bill for the Biden administration’s “human infrastructure” plan is a tax on unrealized capital gains of the superwealthy. This would set tax law into uncharted territory, given taxes have only been imposed on actual income or the gains netted when an asset such as a stock is sold.
This tax would affect only an estimated 700 Americans with net worth over $1 billion or with annual incomes over $100 million for three consecutive years. It would be similar to a wealth tax, such as that proposed by Sen. Elizabeth Warren (D., Mass.) and Sen. Bernie Sanders (I., Vt.), But instead of taxing total wealth, it would tax only the increase in these uber-wealthy individuals’ assets.
Two motivations appear to be behind this proposal. First, Sen. Kyrsten Sinema (D., Ariz.) last week objected to any increase in marginal tax rates for businesses, high-income individuals, or capital gains. Along with fellow moderate Sen. Joe Manchin (D., W.Va.), she has held virtual veto power over the Democrats’ bare 50-vote edge in the Senate. Instead, the billionaires’ unrealized-gain levy, along with changes in corporate taxation that don’t involve raising the statutory 21% rate and increased enforcement by the Internal Revenue Service, would raise an estimated $1.35 billion.
But the tax on unrealized gains also seems a clear reaction to the ability of the ultrawealthy to borrow at low interest rates against their accumulated assets. That way they can spend and live the high life without selling those assets and incurring taxes, while wage earners get income, Social Security, and Medicare taxes withheld from their paychecks.
That’s been especially galling as the stock market has levitated and inflated the wealth of the richest. For example, Elon Musk saw his net worth jump by over $36 billion Monday as the market capitalization of Tesla rocketed past the $1 trillion mark, according to the Bloomberg Billionaires Index. This year alone, Musk’s wealth has zoomed by 70%, or by $119 billion, to $289 billion. Unless he sells his Tesla shares, the increase in their value isn’t subject to taxation. For that reason, Berkshire Hathaway‘s Warren Buffett has commented his favorite holding period for a stock is “forever.” And when an investor dies, the asset’s cost basis is stepped up to the current price, so heirs would face virtually no capital-gains tax liability. (That is apart from estate taxes, however.)
The problems with taxing billionaires’ unrealized gains are myriad, starting with the question of its constitutionality. The 16th Amendment gave Congress the power to collect taxes on “income.” Defining unrealized gains as income would likely result in a court challenge.
Then there is the problem of valuing private assets, from nonpublic businesses to real estate, art, and the like. And in the event of a bear market, there presumably would be tax losses to carry forward against future gains. Sure winners under this scheme would be appraisers and, of course, tax lawyers.
At the same time, the merely well-off may have a favored tax break restored—the deduction for state and local taxes from their federal return. Members of Congress from the Northeast, led by Senate Majority Leader Chuck Schumer (D., N.Y.), reportedly are holding out for repeal or suspension of the $10,000 SALT cap as the price of their vote.
The deduction was limited under the Tax Cut and Jobs Act of 2017, while the standard deduction was sharply increased, to $12,000 for individuals from $6,500 (double for married couples). Losers were those in high-tax states, such as New York, New Jersey, and Connecticut, where income and property levies are routinely multiples of the $10,000 SALT deduction limit.
To get the SALT deal done, Cowen’s Chris Krueger writes, it would take an exercise in sausage making. A two-year suspension of the $10,000 cap is assumed to raise revenue because the revenue losses in 2022 and 2023 would be less than revenue gains in 2026 and 2027, when the cap would be reinstated and the economy would be bigger and the population would be larger. That legerdemain would raise between $28 billion and $73 billion, he writes, and would secure the Northeastern House Democrats’ support.
As the saying goes, you can’t make this stuff up. But these are some of the hidden-ball tricks the Dems are looking at to get the Build Back Better infrastructure bill and the Biden social agenda over the legislative goal line.