Biden’s Big New Wealth Tax

He pivots left again, with a 20% tax on unrealized asset gains

WSJ editorial.

"So much for President Biden’s pivot to the political middle. The fiscal 2023 budget he unveiled Monday re-proposes most of the bad ideas that haven’t passed Congress and adds a new one—a tax on wealth that he refused to endorse as a candidate in 2020. On the economy, he’s pivoting further left—presumably to fire up sullen progressives in November.

The White House is proposing a new “billionaire minimum income tax,” which the Federal Trade Commission would call false advertising if a private company tried that description. The tax isn’t limited to billionaires and it applies to more than income.

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It’s a new tax on Americans with $100 million or more in assets whose effective tax rate in any year is less than 20% of their income. But these taxpayers already pay a 23.8% tax rate on capital gains and 37% on ordinary income. The average tax rate for the top 1% of taxpayers in 2019 was 25.6%.

Here’s the Biden trick: The 20% minimum tax rate would apply both to ordinary income and the increase in the value of assets in a given year. This means taxing unrealized capital gains, which currently aren’t taxed until assets are sold and income is actually realized. In other words, this is a new tax on wealth—even if it’s structured differently than what Elizabeth Warren and Bernie Sanders have proposed. The White House is redefining wealth as income.

Some details of the plan aren’t fleshed out, but the targets would appear to have nine years to pay the 20% tax on the growth in their assets from the first day they accumulated them. Going forward they’d have five years to pay the tax on their annual unrealized capital gains.

It’s not clear whether losses in future years would be allowed to offset annual gains. So a taxpayer might have to pay a tax, say, of $2 million on an unrealized gain in 2022 of $10 million. But if the asset declined by the same $10 million the next year, tough luck. The government would win whether financial and other assets rise or fall.

Taxpayers would have to report their assets to the IRS annually. Non-tradeable assets like a stake in a private company would be assessed at the last valuation event, increased annually at the five-year Treasury rate plus two percentage points or “other methods approved” by the Treasury Secretary.

The White House proposal would enormously complicate the tax code and create huge investment distortions. “Illiquid” taxpayers—defined as those whose tradeable assets make up less than 20% of their wealth—could defer payments until their sale and incur an interest charge. Investors would thus have an incentive to pile into illiquid assets such as real estate to avoid regularly liquidating stock to pay taxes. Rather than sell stock to invest in other ventures, investors might have to sell stock they’d prefer to hold in order to pay taxes on unrealized capital gains.

Progressives claim the tax will unlock capital by discouraging the wealthy from holding stock over time. But if liberals want to encourage capital to flow more freely, they should make the capital-gains rate zero. That’s what some countries do. And hasn’t the left spent years deploring investor “short-termism”?

Another disingenuous argument is that taxing only realized gains narrows the tax base and requires higher tax rates on income. But the Administration isn’t proposing to reduce tax rates. Its budget proposes raising the corporate rate to 28% from 21% and the individual top rate to 39.6%. The wealth tax is intended as an entirely new and additional revenue stream that would rake in close to $360 billion over 10 years.

The Administration says the tax would apply only to the top 0.1%—meaning hundreds of successful entrepreneurs and small business owners who accumulated wealth over decades through innovation and hard work. But these new taxes always start out applying to a few and then spread to millions.

The income tax in 1913 applied a 7% top rate on taxpayers making more than $500,000 ($14.5 million today). The Alternative Minimum Tax was created in 1969 as a flat 10% tax on the uber-rich but grew to cover tens of millions in the middle class.

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This all assumes the wealth tax would make it past the courts. The Constitution says Congress may only impose “direct taxes” if they are apportioned among the states according to their population. The Sixteenth Amendment lets Congress tax income, but unrealized capital gains aren’t income any more than unvested stock options are.

A tax increase of this magnitude is never desirable, but the timing now is especially bad. The Federal Reserve is raising interest rates to counter inflation, and the bond-market yield curve is close to inverting, which can sometimes augur recession. Democrats already own inflation politically. If they now pass a giant tax increase, they will own all of the economic damage."