President Biden wants to raise taxes on Elon Musk, Jeff Bezos, and their American contemporaries, who have amassed extraordinary wealth that is not taxed under current law.
Biden has said his plan would make the system more fair, but experts say it lacks practicality.
The president wants to impose a minimum 25% tax on all Americans with assets over $100 million. The “billionaire tax” would affect the 10,700 wealthiest Americans and generate an estimated $400 billion in revenue over 10 years.
The idea of imposing higher taxes on those at the top of the economic hierarchy is not new. But the latest proposal raises more questions than answers.
“Are we taxing the rich? Are we taxing the wealthy?” Peter Ferrigno, director of tax services at Henry & Partners, a citizenship investment consulting firm, told Yahoo Finance. “They're very similar, but they're not the same thing.”
Additionally, the proposed policy challenges a fundamental tenet of U.S. tax law, which treats money earned as income as distinct from wealth created through appreciation.
read more: How bonuses are taxed (and why it matters)
How can the US government tax wealth?
Biden has not provided many details, but experts have said that in order to reach the 25% minimum tax rate, unrealized gains (unsold profits from rising asset values) would need to be taxed as part of billionaires' income. The family says. Under current law, unrealized gains are not taxed until the asset is sold at a profit.
The president says this is the proper way to calculate the true incomes and true tax rates of the ultra-wealthy. Billionaires make the majority of their money from growing stocks and investments, rather than wages earned from a 9-to-5 job. So just because you're not pocketing the profits doesn't mean you should hide your income, the president says.
“Billionaires often don't have a regular salary,” Brandon Zreich, managing director and portfolio manager at Johnson Investment Counsel, told Yahoo Finance.
Take one of the world's richest people as an example: Elon Musk's net worth increased by nearly $12 billion in the five years since 2018, from $8.4 billion to $20 billion. However, Musk reported only $1.52 billion in income during that time, and he paid $455 million in taxes.
That may sound like a lot, but Musk's actual tax rate was just 3.79%. By contrast, the median U.S. household made $70,800 in 2021, and the average tax rate was 15%.
Under Biden's proposal, Musk's tax bill would total $3 billion from 2018 to 2022, nearly seven times what he paid.
The 25 richest Americans paid $13.6 billion in federal income taxes from 2014 to 2018. Meanwhile, their wealth increased by a combined $401 billion over the same period, ProPublica reported. This means that their overall average true tax rate was 3.4%.
To redesign this aspect of the tax code, Biden needs to consider: What happens when unrealized gains turn into losses?
In other words, how do taxes come into play if the value of your investment declines on paper?
“If you start taxing unrealized gains instead of realized gains, you're going to go down a very slippery slope,” Ferrigno said. “Do you want to tax something that goes up? Are you going to give your money back if it goes down again?”
For example, if Mr. Musk's Tesla (TSLA) stock skyrockets from $100 billion to $200 billion, Mr. Biden's proposed wealth tax would cost Mr. Musk $25 billion in that year, which means This is 25% of the $100 billion in unrealized gains. But if Tesla stock drops $100 billion next year, will the government have to pay Musk back?
“From there, it becomes clear why other countries don't do this,” Ferrigno said. “Income taxes have been around for centuries. And the reason no one has done this is because it's virtually impractical.”
Also read: What is the Earned Income Tax Credit and am I eligible for it?
The top 1% pay almost half of US taxes
Opponents of the wealth tax argue that the top 1% already pays a sufficient share of federal taxes. In 2021, the top 1% paid more than $1 trillion, nearly half of all tax revenue collected, according to the Tax Foundation.
“The U.S. income tax system is highly progressive and redistributive,” said Erica York, a senior economist at a right-wing think tank. Tax Foundation and author of the latest report on income tax data. told Yahoo Finance. He added that the top 10% pay almost 76% of all tax revenue.
Critics also point out that the wealthy already face a separate income tax, making Biden's proposal redundant and unnecessary.
The Alternative Minimum Tax (AMT) is a parallel system that sets a floor for the amount that high-income earners must pay. This removes some benefits and deductions from your tax return, limiting the reduction in your tax liability.
“The alternative minimum tax has existed in the United States for about 50 years,” Ferrigno said. “They already have tools in their toolbox to try to deal with it. [taxes on high incomes]”
Ferrigno said updating the AMT would be enough to tax billionaires' income.
Caution: Don't be like Norway
History shows how exorbitant income inequality can lead to social crises. “Going back to the French Revolution, if you're not careful, it's the guillotine,” Ferrigno said.
But he said the Biden administration should start by lowering the tax rate on billionaires to around 10% and move from there to 25%.
After all, imposing overwhelming wealth taxes on the highly mobile ultra-rich could be counterproductive. A number of billionaires left Norway in 2022 after the country introduced a 1.1% capital wealth tax on married households with assets worth more than $3.7 million.
“Find what works and import it and avoid something like Norway driving half of its cars.” [ultra-wealthy] Please leave,” Ferrigno said. “Look at how high the threshold is in Spain, where people reluctantly accept it.”
Spain has had a regional wealth tax of 0.16% to 3.5% for many years. But instead of emigrating, wealthy Spaniards accepted wealth tax rates or moved to cheaper areas of the country.
“[Spain’s wealth tax] It’s been there for so long that people are used to it,” Ferrigno said. “Furthermore, due to exemptions, very few people end up in the top slot.”
Switzerland also imposes various regional-level wealth taxes on personal assets around the world, such as bank account balances, stocks, ships, and airplanes.
Innovative technologies such as blockchain ledgers and artificial intelligence are transforming the financial system, but the U.S. tax code has yet to catch up.
“The current system we sit in today may have been great in the past, but it's not so great today,” said Jose Murillo, partner and national tax leader at Ernst & Young. said.
A recent Bloomberg poll found that an overwhelming majority of American voters, 70%, support the idea of raising taxes on billionaires.
Biden said taxing America's wealthiest citizens “imagine what we could do, from reducing the deficit to providing child care to providing health care to continuing to provide for our military with everything they need.” Please take a look.''
“This is not beyond our ability,” Biden said.
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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