A proposal to tax billionaires is back in the news, although with discouraging words from Sen. Joe Manchin (D-W.Va.), it may be short-lived. But it should be seriously considered, along with other tax policies that capture the untaxed income and wealth of the ultra-wealthy. Taxing billionaires is both good policy and good politics.
President Biden introduced the “Billionaire Minimum Income Tax” as part of his recent budget proposal, to ensure that the wealthiest Americans “pay their fair share.”
A similar version of the billionaire tax was originally proposed by Sen. Ron Wyden (D-Ore.) in the fall of 2021 as a way to pay for the stalled out Build Back Better investment bill.
The president’s proposal would levy a 20 percent tax on the incomes of an estimated 30,000 households with over $100 million in wealth. If the traditional income tax falls below an effective rate of 20 percent, as it often does with the ultra-wealthy, it would assess the unrealized capital gains to ensure a minimum of 20 percent is paid. The Biden administration estimates this would bring in about $360 billion over the next decade.
The tax plugs an important gap. One of the biggest loopholes in our current tax system is that unrealized capital gains are not taxed when assets are passed on to heirs, allowing them to benefit from the “step up in basis” provision. A share of Apple stock, purchased in 1990 and passed on through inheritance, has its valuation reset, eliminating any capital gains tax obligation.
This is just one of the ways the tax code is tipped in favor of affluent and ultra-wealthy households. Thanks to research over the last several years, we know that most billionaires in the U.S. are paying laughably low effective tax rates.
Between 2014 and 2018, the 25 wealthiest Americans saw their wealth increase by $401 billion, according to data from Forbes. ProPublica’s analysis of IRS data found this group paid a total of $13.6 billion in federal income taxes during these years, an effective rate of only 3.4 percent. The White House released a 2021 analysis estimating that the wealthiest 400 families paid an average effective rate of 8.2 percent on a combined $1.8 trillion in income during the period 2010 to 2018.
During the last two years of the pandemic, the combined wealth of U.S. billionaires surged $1.7 trillion, a gain of 57 percent. These extraordinary gains, under current tax laws, are not captured by our federal tax system.
The federal estate tax, the only levy on the transfer of concentrated wealth of multi-millionaires and billionaires, has become porous and effectively optional for the wealthiest households. One Trump administration official quipped that “only morons pay the estate tax.” In 2020, the estate tax was paid by 1,275 wealthy families and only generated $9.3 billion in revenue, down 50 percent since 2018. Only families with wealth over $24.12 million are subject to estate taxes in 2022.
Estate tax revenue is plummeting because the wealthiest 0.01 percent aggressively use trusts and other tax dodges to game their estate taxes down to zero. One ProPublica analysis found that of the 100 wealthiest Americans, half use a complex scheme called a Granter-Retained Annuity Trust (GRAT) to avoid estate taxation and pass on unlimited inheritances to their heirs.
A Billionaire Minimum Income Tax would offset some of the porousness of the estate tax and “stepped up in basis” rules. Combined with a millionaire surtax, a higher top rate on all forms of income over $2 million, lawmakers could begin to patch the holes of missing revenue from the wealthy.
We’ve come a long way from the days where congressional lawmakers were afraid to advance progressive revenue proposals. And now a sitting president has proposed a tax with a laser focus on those with wealth over $100 million. They are bolstered by polls showing wide support for taxes on the ultra-wealthy. Public opinion has likely been influenced by the unequal wealth gains of the last decade, including during the pandemic, and exposes on tax avoidance.
Biden’s proposed billionaire tax would be a meaningful step in rebalancing the tax code and ensuring that everyone, including the ultra-wealthy, pay their fair share.
Chuck Collins is director of the Program on Inequality and the Common Good at the Institute for Policy Studies where he co-edits He is the author of “The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions”.