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The White House unveiled a new “billionaire tax” as part of its $5.8tn budget proposal on Monday, as it sought to offset spending increases in areas such as defence and social care without raising taxes for ordinary Americans.
The proposal is the first time Joe Biden has offered a detailed policy to impose a tax on the wealth of the richest Americans. The US president has previously shied away from targeting billionaires directly, instead pushing for higher taxes on capital gains and companies.
The low effective tax rate applied to the ultra-wealthy has long been a political pressure point in the US. In a document outlining the new tax, the White House estimated that American billionaires pay just 8 per cent of their total income in taxes, while a firefighter or teacher pays double that rate.
Yet previous efforts to boost the tax rate of US billionaires have failed, and similar wealth taxes pushed by progressive Democrats have stalled in Congress, which must pass the president’s budget.
So how will Biden’s new tax proposal work?
What is the ‘billionaire tax’?
Although the new tax has been named the “billionaire minimum income tax”, it will hit all American households worth more than $100mn with a new minimum tax of 20 per cent on all of their income, including on unrealised investments.
Many of America’s wealthiest people are currently able to pay lower tax rates than average Americans because the value of their investments are not taxed until they are sold. However, they are able to borrow against their holdings, often at relatively low rates of interest, without triggering capital gains tax.
This type of borrowing has been on the rise for more than a decade but the pace has picked up since the Federal Reserve cut interest rates in response to the pandemic.
For instance at JPMorgan Chase, the largest US bank by assets, loans at its asset and wealth management division totalled $282bn at the end of 2021. This was up 42 per cent year on year, far outpacing the 6 per cent growth in the bank’s overall loan book last year.
For borrowers, such loans are not without risk. In one instance, several Peloton executives had borrowed heavily against their shares in the fitness company, allowing them to cash in some of 2020’s stock price gains without incurring a steep tax bill. However, they were later hit with margin calls to post more collateral when the stock price plummeted, the Financial Times reported last month.
The new policy will attempt to value both tradable assets such as stocks, and non-tradable and illiquid assets such as privately held firms or expensive artwork, in order to calculate the tax.
Garrett Watson, senior policy analyst at the Tax Foundation, said the difference in the treatment between the two could lead to non-tradable assets being taxed at a lower rate than tradable assets because of the complexity of the calculations involved.
How many people would be affected by it?
The new tax will not apply to the overwhelming majority of US citizens. The White House estimates about just 0.01 per cent of US households will be affected by the tax, and forecasts that more than half of those hit will be billionaires.
The rate would also only apply to taxpayers who do not already pay at least 20 per cent on their income and unrealised gains. Anyone currently paying beneath that level would have to pay a top-up rate to reach a minimum of 20 per cent.
How much money would it raise?
The White House estimates the tax would raise about $360bn over the next decade, which would help pay for other priorities in Biden’s spending bill such as measures to lower the cost of prescription drugs and provide additional funding for policing and law enforcement.
Gabriel Zucman, an economist from the University of California at Berkeley, estimated that the top 10 American billionaires would end up paying at least $215bn in tax in total over the next decade if the rule came into force.
Will the proposal pass Congress?
Probably not.
Democrats in the Senate tried to pass similar versions of this bill last October, but failed to get them passed after a backlash from some moderate senators including Kyrsten Sinema from Arizona.
Democratic senator Joe Manchin, who holds a key vote in the Senate, has already indicated he does not back the proposals and has called the idea of a wealth tax on unrealised gains “a tough one”. “There are other ways for people to pay their fair share,” said Manchin.
Ron Wyden, Democratic chair of the Senate’s powerful finance committee, last year sponsored a billionaire income tax that would have taxed the unrealised gains of billionaires on an annual basis. On Monday, Wyden backed Biden’s proposal.
“There’s no way to fix our broken tax code without getting at the problem of billionaires avoiding taxes for decades, if not indefinitely,” he said.
But Biden is likely to need a two-thirds majority to pass the measure through the 50-50-split Senate, which would require the backing of some Republicans, as well as the entire Democratic caucus.
Beacon Research, a political analysis consultancy, said moves to increase tax on the wealthy were unlikely to be passed by Congress and that a presidential budget should be viewed more as a “messaging tool” than policy.
“Taxing the rich and wealthy always polls well, so there’s limited downside to playing the ‘Scranton Joe’ populist in a budget,” it said in a note. “But as we have seen time and time again, there doesn’t seem to be the political capital and might to push any such proposals through Congress.”
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