Hiltzik: We need a billionaires tax

After years of largely theoretical discussion among Democrats, the idea of a billionaires tax has now become official policy.

Kudos to President Biden for putting the billionaires tax on the table as part of his budget proposal for fiscal 2023. As we’ve reported many times in recent years, a means of forcing the richest of the rich to pay their fair share of taxes has long been overdue.

Until now, the idea has been identified with the liberal wing of the Democratic Party, proposed in the past by Sens. Elizabeth Warren of Massachusetts and Ron Wyden of Oregon, as well as Sen. Bernie Sanders (I.-Vt.).

This approach means that the very wealthiest Americans pay taxes as they go, just like everyone else, and eliminates the inefficient sheltering of income for decades or generations.

— President Biden, introducing his billionaires tax

Biden has now made it mainstream, though his plan is somewhat more modest than the others — his proposal for a wealth tax would raise about $360 billion over 10 years, according to the White House, less than Wyden’s ($507 billion) or Warren’s ($2.75 trillion). The differences arise in part from where the tax would start and how it would be calculated.

The earlier proposals provoked a chorus of hand-wringing from our beleaguered billionaire class.

Billionaire Leon Cooperman objected to Warren’s plan with profanityand billionaire Elon Musk tried to tweak Wyden over his proposalwhich like Biden’s targeted unrealized capital gains — that is, gains in the value of assets such as stocks and bonds before they’re sold. Wyden responded that Musk’s approach of turning tax policy into a game merely underscored the necessity of a wealth tax.

So will this plan, especially because it takes direct aim at the capital gains tax, the favorite loophole of the wealthy.

Biden’s proposal is for a minimum 20% tax on the income of households with more than $100 million in wealth. The White House says that more than half the revenue would come from households worth more than $1 billion.

If it’s passed, the proposal would be a major step toward closing the gap in tax rates between the middle- and working-classes on one side and the wealthy on the other.

The White House in September estimated that the 400 wealthiest families in America paid an average federal individual income tax rate of 8.2% on $1.8 trillion of income between 2010 and 2018. “A firefighter or teacher can pay double that tax rate,” Biden said in his budget statement Monday, citing the earlier estimate.

The proposal would also draw a bright line between the policies of the Democratic and Republican parties.

The latter has all but defined itself as an agent of the wealthy. Its latest position paper, the “Rescue America” plan issued by Sen. Rick Scott of Florida, called for raising taxes on the poorest American households. (Scott’s household net worth of about $220 million, by the way, would put him right in the target zone of Biden’s proposal.)

Nor should it be forgotten that the last restructuring of the federal income tax, in 2017, was a GOP project that disproportionately cut taxes on the rich.

Biden’s focus on the treatment of capital gains is proper, as we’ve reported in the past. The reason is that capital gains, which enjoy preferable treatment in several respects, provide most of the income reported by the wealthy. The richer you are, the more of your income receives that happy treatment.

In tax year 2019, the most recent for which the IRS published statisticsthose with more than $10 million in reported income attributed 57% of it to net capital gains and dividends (which also receive preferential tax treatment). For households with less than $75,000 in income, the figure was 2.2%.

More than 80% of the income of that latter group came from wages and salaries, which are taxed at higher rate and taxed as they’re earned. For the wealthy group, the figure was only 17%.

According to the Federal Reservethe top 1% of households by wealth (a threshold that starts at about $11.1 million) own about 23% of all the corporate equities and mutual fund shares in the country; the bottom half of all households own a collective 0.7%.

How do capital asset owners make out like bandits at tax time? Let us count the ways. First, the maximum tax rate is lower — 23.8% (including the net investment income tax of 3.8%), compared with the 40.8% top rate on ordinary income.

Then there’s the fact, as the late tax expert Edward Kleinbard of USC never tired of pointing out, that the tax is our only voluntary tax: It’s levied only if and when the owner chooses to sell.

If it’s still in the owner’s estate at death, all the embedded tax is extinguished forever — the heirs have to pay tax only on the difference between the asset’s value at the previous owner’s death and its value when they sell, rather than the difference between its purchase price and their sale price.

This is known as the step-up in basis at death, and it’s a crucial driver of the accumulation of wealth within family dynasties.

Biden is absolutely correct in targeting the manipulation of the capital gains tax for eradication by proposing a minimum billionaires tax that includes unrealized capital gains. “The preponderance of capital gains in the portfolios of the wealthy accounts for why it has been so difficult to bring its tax treatment into line with what the rest of us suffer.

“This approach means that the very wealthiest Americans pay taxes as they go, just like everyone else, and eliminates the inefficient sheltering of income for decades or generations,” Biden said in a fact sheet issued Monday.

You’ll probably be hearing from water-carriers for the rich that taxing unrealized gains doesn’t compensate asset owners for their losses in down years. The numbers show that this is a made-up problem: The stock market has been a very reliable engine of wealth growth and remarkably resilient even during what the average person might consider bad times.

Over the last 40 years, or the period from January 1982 through the end of 2021, there were only seven years in which the Standard & Poor’s 500 index, the best proxy for the overall stock market, lost money. On average, stocks gained 12.4%. One dollar invested at the beginning of the period was worth $107.13 at the end.

By the same token, through the 21 years of this century (that is, January 2001 through Dec. 31, 2021) there have been only five down years and an average gain of 8.38% a year. One dollar invested when the ball came down at Times Square on New Year’s Day 2001 is worth more than five times as much today.

Even during the worst economic stretch of the last 100 years, the Great Depression (defined for our purposes as January 1929 through the end of 1939), the stock market lost an average of 0.6% a year.

In any event, Biden’s proposal would give the target households up to nine years to fork over what they owe on existing unrealized gains and five years to pay the tax on new income. That would “smooth year-to-year variation in investment income,” the fact sheet states.

The coming debate over Biden’s tax proposal will probably focus in part on its constitutionality. This question will be a stalking horse aimed at absolving critics of the charge that they’re just out to protect billionaires. But it’s been endlessly masticated by experts, many of whom assert that it can be fashioned in a way that passes constitutional muster.

Biden’s characterization of the levy as a “Billionaire Minimum Income Tax” — emphasis on the word “income” — is designed to keep the proposal within the exemption for income taxes from the Constitution’s strictures on how taxes must be calculated.

That’s clever, but it addresses just one of the untold ways that spokespersons for the wealthy will try to eviscerate a plan that hits them in their well-fattened pocketbooks. With so much money at stake, the battle could be ferocious.