The Billionaire Tax Illusion - Gary Sasse

The Billionaire Tax Illusion - Gary Sasse

To help finance President Biden’s Build Back Better Agenda, Democratic congressional leaders appear to have dropped the idea of increasing the tax rates on corporations and upper-income individuals. In lieu, they have reached into their bag of tax tricks and may propose a 15 percent minimum corporate tax as well as a billionaires’ tax. While the minimum corporate tax is justifiable, the billionaires’ tax is fraught with uncertainties.

The proposed wealth tax would require billionaires and those earning more than $100 million annually for three consecutive years to pay a tax on the income from unrealized capital gains. Specifically, this levy would tax gains on physical and financial assets regardless of whether the taxpayer has sold them or not.

Proponents argue that this tax on approximately 700 billionaires would make the tax system fairer. They point out that wealthy taxpayers can borrow against the value of their assets to make purchases, and do not pay taxes on such loans because they are not classified as income.

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There may be some truth to this argument, but as Representative Richard Neal (D-MA), Chairman of the powerful House Ways and Means Committee acknowledged the billionaire tax could be a logistical nightmare.

Some of the unanswered questions revolving around this tax proposal include the following:

How will the IRS establish the value of non-financial assets? Applying the tax to non-financial assets such as intellectual property, artworks, and jewelry is subjective, and would present challenging administrative problems for the IRS.

The National Review reported that Steven Rosenthal of the liberal Tax Policy Center “pointed out how it might be easy to estimate the growth in financial securities (stocks, bonds, mutual funds, exchange-traded fund, etc.) and even real estate, but it’s a good deal harder when it comes to things like intangible assets, closely-held businesses, artworks, and collectibles, etc.”

What legal tax avoidance strategies will be gamed? For example, what would prevent billionaires from allocating assets among family members?

How would the IRS address losses in asset values?  Will the taxpayer be able to carry the lose forward to offset future gains, and at what levels?

These questions show the complexities involved in levying and collecting a billionaire tax, which as a result is likely to have unintended consequences. As the Wall Street Journal editorialized, “Complexity is one reason European countries, including France, Germany, and Sweden, abandoned broad-based wealth taxes. Many of the rich dodged wealth taxes by exploiting carve-outs or moving.”

However, the biggest obstacle to the tax on a billionaire’s unrealized capital gains is its questionable constitutionality, which no doubt will engender legal challenges. The Sixteenth Amendment to the United States Constitution authorized the federal government to impose an income tax. It provided that “The Congress shall have the power to levy and collect taxes on income from whatever sources derived”. The question that the courts will have to decide is whether or not unrealized capital gains are taxable income?

There is precedent and case law on this matter. In Eisner v. Macomber (1920), as Joe Bishop-Henchman of the National Taxpayers Union noted, the nation’s highest court said it was unconstitutional to base a tax on the increase in value of the stock that had not actually been sold. The Supreme Court found, “Mere growth or increment of value in a capital investment is not income”.

To succeed President Biden’s Build Back Better program should be built on a firm fiscal foundation. A billionaire tax may be a fiscal foundation built on sand.

Gary Sasse is the Founding Director of the Hassenfeld Institute for Public Leadership at Bryant University