A Billionaire Wealth Tax Is Squarely on the Table for the First Time. So What’s the Deal With It?

Photo courtesy of Getty Images

When Sen. Kyrsten Sinema (who once brandished solid progressive credentials but now takes most of her money from pharmaceutical companies) refused to consider undoing the Trump tax cuts on corporations and the wealthy, that left Democrats with only 49 out of the 50 votes needed to pay for the Build Back Better plan by using new taxes on those making over $400,000 and raising the corporate income tax rate.

How to come up with the funds, then? One chunk of that money could come from the so-called “Billionaire’s Tax”—a proposal that is part Elizabeth Warren (D-MA), part Ron Wyden (D-OR). The idea is simple in concept but will face challenges in implementation and in court. Nevertheless, Sen. Sinema appears to find it acceptable because it doesn’t raise the corporate tax rate and only affects about 1,000 or so of the richest people in America. That places it front and center on current budget negotiations, and so we now ought to take a much closer look.

What is the Billionaire Tax?

As presently conceived by Sen. Wyden, who chairs the powerful Senate Finance Committee, the new tax would treat unrealized gains in tradable securities as “income” for the purpose of taxation. On non-tradeable assets, such as real property or shares in private companies, the tax would also apply but be deferred, with the tax not owed until the asset is sold. The new law would apply to anyone with over $1 billion in assets or who made at least $100 million each year for the past three years.

This is best understood by example. If Elon Musk gained $80 billion on paper on his stock in Tesla this year, next year he would owe taxes on that gain—likely at the long-term capital gains rate of 20 percent, though there is some debate over whether it should be treated as ordinary “income” at a far higher tax rate. 

To pay for it, he might have to sell a portion of his Tesla stock. In the example above, Musk could sell $16 billion to pay for his tax liability, leaving him unrealized gains of $64 billion instead of $80 billion. Tesla stock would likely come under pressure from this sale, but it would probably eventually get baked into the trading price.

Wyden (and Warren) have tapped into a deep sense of frustration and resentment by the American people against the billionaire class. The “wealth tax” is gaining traction and popularity, but unsurprisingly it has some critics, too.

Implementation Is Tricky

A tax on unrealized capital gain sounds great when there is a rising stock market, but what happens when there are instead big stock losses because of a fall in the markets? If the U.S. government is relying on the revenue—somewhere around $200 to $250 billion annually—to meet its budget projections, a sharp downturn could erase all of that money. This could become a compounding problem, as downturns in the market usually are the result of existing issues (such as a global pandemic or financial crisis) and so the loss in government revenues could exacerbate the problem. This risk has led Senate Minority Leader Mitch McConnell to dub the billionaire tax a “hare-brained scheme,” warning that revenues could dry up in downturns.

This points out another issue: Would the billionaire taxpayers get to undo some of their tax liability if the value of their shares were to fall? Could they apply those paper losses against the paper gains in a subsequent year, as taxpayers normally are allowed to do? If so, there would be a strong incentive to find a way somehow to “create” losses on a balance sheet while still enjoying the benefits of being wealthy. If you think that sounds strange, the former president did it for years when he took one massive $916 million loss and carried it over to subsequent years, resulting in zero income tax for many of them.

In addition, at what point in time would the valuation occur each year? If this time is set at a date certain, there would again be a perverse incentive to obtain a valuation that is low on that date, even if the stock were to spike higher a week later. The potential for shenanigans runs high. There are probably ways around these issues, but the bill drafters have got to be smarter than the armies of lawyers that the billionaires will hire to fight their tax bill. 

And this leads us to another issue…

Is it legal?

The power of the federal government to assess taxes is limited by the U.S. Constitution. Once upon a time, there was no national income tax. The government levied tariffs and sales taxes to keep things running, but the Civil War broke that model, and rising inequality meant that the rich were accumulating wealth and not paying much by way of taxes. Attempts to pass income taxes—and these were originally only on the rich—got blocked by the Supreme Court, which noted that Article 1, Section 2 of the Constitution forbids taxes that aren’t levied in proportion to the states’ populations.

Enter the Sixteenth Amendment, which gave the national government express authority to pass an income tax. That’s what we’ve been operating under ever since. But the new proposed wealth tax isn’t really a tax on income, it’s a tax on assets—in essence, a property tax. The federal government doesn’t impose federal property taxes; only state and local governments do. And that’s largely because of Article 1, Section 2’s requirement of state per capita apportionment.

There’s a strong chance that the currently 6-3 conservative SCOTUS will hold that any wealth tax, however popular, to be an impermissible property tax that isn’t apportioned among the states by population and is therefore unconstitutional. Wyden’s bill tries to get around this by calling it an income tax, but the current Court is very likely to be skeptical. To get such a tax past these justices, you might actually need a Constitutional amendment with 36 states going along with ratification. That seems unlikely in the extreme given GOP control of most state legislatures.

What Democrats might do, then, is simply pass the budget with the wealth tax in it and let the chips fall, i.e. wait for the court challenges and loopholes, using them as examples of how the GOP and the billionaires are doing everything to get out of having to pay their fair share. If the tax gets struck down or fails due to implementation issues, Democrats can come back with a stronger majority (just one more seat!) in 2023 and pass a new bill that actually raises income taxes on the rich and on corporations, as the House bill originally intended.

Democrats have a very limited window to adopt the new billionaire tax, with this week being the nominal deadline for at least a working outline of the budget bill with all the major pieces of spending and offsetting revenue mechanisms in place. The billionaire tax may or may not survive this process, but one thing is already clear: The very fact that it is on the table and under serious consideration for the first time in our history is monumental in and of itself. It is a vindication of what Elizabeth Warren has been arguing for these past years, and it likely means we haven’t seen the last of such efforts but rather are only beginning to explore them.