Senate Democrats detailed their proposed levy on billionaires, a new and logistically risky approach to taxation that lawmakers hope will help fund President Joe Biden’s social spending aimed at low- and middle-income Americans.
The plan, sponsored by Senate Finance Committee Chairman Ron Wyden, is the result of weeks of negotiations among Democrats about how to find ways to raise taxes on the wealthy that nearly every member of the party can support. Wyden is betting that fellow lawmakers — and voters — will broadly back a plan that would shift more of the tax burden to the very wealthiest.
The levy would apply to taxpayers who for three consecutive years have had assets worth at least $1 billion or have earned at least $100 million three years in a row. The thresholds mean about 700 people would be affected, according to a summary of the plan.
Even if the proposal does pass, collecting the several hundred billion dollars that Wyden’s office says it will raise depends on the rules withstanding likely court challenges and loophole-seeking by those in the IRS’s sights.
The idea gained momentum over the past week as a top alternative to fund a nearly $2 trillion plan to enact Biden’s social-spending proposals, after Arizona Senator Kyrsten Sinema told her colleagues that she couldn’t support the more straightforward approach of raising tax rates on top earners and corporations, effectively sinking that cornerstone of Biden’s agenda.
“There are two tax codes in America. The first is mandatory for workers who pay taxes out of every paycheck. The second is voluntary for billionaires who defer paying taxes for years, if not indefinitely,” Wyden said in a statement. “Two tax codes allow billionaires to use largely untaxed income from wealth to build more wealth.”
The proposal would require the richest Americans to pay taxes annually on appreciation in publicly traded assets, such as stocks and bonds. Non-tradable assets like real estate or closely-held businesses, which are harder for the IRS to value, wouldn’t be taxed until they’re sold — though they would incur an additional fee, called a deferral recapture amount, akin to an interest charge.
Most asset gains in the plan would be subject each year to the top long-term capital gains rate, which is 23.8% currently. For illiquid assets that would also be subject to the additional recapture amount, the total rate would not be higher than 49%, according to a detailed outline of the legislation.
Wyden has worked for several years to find ways to collect annual taxes on the accrued fortunes of the ultra rich. The plan would upend longstanding tax-code principles that allow taxpayers to defer paying capital gains levies on their assets until they sell, an approach that has been gaining popularity among Democrats looking to address worsening wealth inequality.
The 50-50 partisan split in the Senate means Democrats must stay unified to pass the Biden tax-and-spending plan using a budget vehicle called reconciliation, with Vice President Kamala Harris as tiebreaker.
Democrats have been looking at other revenue options in recent weeks, including a 15% corporate minimum tax unveiled Tuesday to raise as much as $400 billion over 10 years. Sinema quickly announced her support for that plan; her position on the billionaires’ tax remained unclear as of late Tuesday.
The plan, which would take effect in 2022, requires billionaires to pay taxes on all their appreciated tradable assets to date. However, they can elect to spread that cost over five years. Taxpayers who face losses on their portfolio in a year will get breaks that they can apply to up to three years in the past, or indefinitely in the future, to offset tax bills.
Pass-through entities, where a billionaire holds at least a 5% stake, or one valued at $50 million, would have to report the gain of the assets so taxpayers can’t hide assets in other entities. There also are rules that would tax transfers from billionaires to trusts so they can’t avoid taxes using complex wealth planning.
In addition, billionaires who want to give up their U.S. citizenship would be required to pay taxes on their entire fortunes before expatriating.
Some Democratic lawmakers already worry that that plan is too complex and risks unintended consequences.
“The devil is in the details,” Senator Mark Warner, a Virginia Democrat, told reporters Tuesday. “We all want to make sure those who have done extraordinarily well pay a fair tax, but how you do it is really important.”
House Ways and Means Chairman Richard Neal has also raised concerns about the plan’s constitutionality and said that when his panel looked into similar ideas, potential legal problems led members to reject the approach.
Indiana University law professor David Gamage said Wyden’s proposal could likely withstand court challenges.
“If you take existing precedents seriously, it’s quite safe,” he said. Focusing the yearly mark-to-market levy only on tradable investments, as Wyden’s plan does, is on firmer legal ground than an alternative such as taxing the annual gains of all private and public assets, he said.
Another question is how the IRS would find billionaires who should be subject to the tax, because there currently isn’t a requirement for people to report their total net worth to the IRS. Senator Elizabeth Warren, who helped Wyden develop the plan, said these are issues the Internal Revenue Service can tackle.
“This is not an insurmountable problem for the IRS,” Warren said. “This is a manageable undertaking.”
Still, some lawmakers are optimistic a broader agreement on a spending package is in reach.
“I think that we’re close, and I hope we’ll have a deal by the end of the day,” Senator Chris Murphy, a Democrat from Connecticut, told CNN on Wednesday morning.
—With assistance from Erik Wasson, Ben Steverman and Josh Wingrove.
This article was provided by Bloomberg News.