Biden’s Billionaire Tax Wouldn’t Just Hurt Billionaires

One of the most important lessons in tax policy is that the person who is handed the bill and sends the check to the taxman isn’t necessarily the person shouldering the entire cost—or even the bulk of the cost. Although a tax may initially be imposed on a handful of wealthy taxpayers, it is not limited to them. The White House budget proposal for fiscal year 2023, which includes the “billionaire” tax introduced by the White House is a perfect example of this.

The wealth tax would be imposed on appreciated assets worth at least $100 million by certain households. This would break new ground in unfair taxation by requiring these households to pay at least 20 percent—composed of both traditional taxes on income and, going forward, unrealized gains in owned liquid assets.

Erica York and Garrett Watson from the Tax Foundation describe how it would work.

Consider a household with net wealth of $200 million, $5 million in ordinary income, $10 million in accumulated unrealized capital gains from a privately held company, and an ordinary tax liability of $1.8 million in 2023….When including unrealized capital gains as income, the household’s effective tax rate is 12 percent, below the proposed 20 percent minimum. A household with an income of $15 million and a $1.2million in unrealized gains must pay additional tax to raise their effective tax rates to 20%.

Okay, so that sounds stiff. But let’s not forget about everyone else. President Joe Biden’s administration reassures us that we—non-billionaires or millionaires—wouldn’t pay a dime of this tax as it would only be imposed on the top 0.01 percent of households, with half of the revenue coming from checks written by billionaires. That is what I would like.

The tax is not perfect. For instance, it is unclear that taxing wealth as opposed to income wouldn’t face constitutional problems, as Sen. Joe Manchin (D–W.Va.) As Sen. Joe Manchin (D.W.Va.) pointed out, it is unclear that taxing wealth as opposed to income would not face constitutional problems. It will also be prohibitively administratively, as we’ve seen from wealth taxes in other countries. Many European countries with wealth taxes have since abandoned them.

It would also likely generate very low revenue. Capital is highly mobile so it would be easy to move to countries that have lower tax rates. Alternatively, the owners of the assets in question could be forced to sell—often to foreigners—also leaving less to tax.

It would also reduce U.S. savings and capital formation. This would impact everyone who isn’t a millionaire. The wealth of billionaires isn’t held the way most believe it to be—stored as if in gold or cash under their beds. Their wealth tax burden ultimately results in a loss of income for their employees as a result.

Similar to billionaires, some of their wealth ends up being loaned out to new entrepreneurs or smaller businesses. The wealth tax could also be harmful to non-billionaires.

Finally, my Mercatus Center colleague Thomas Hoenig noted recently in a Barron’sA magazine article on why billionaires should be worried about the middle-class. It is likely that if this proposal was to be implemented it would most likely to expand to cover more Americans. The income tax was passed by Congress in 1913. It “topped out at 7 percent for incomes above $500,000.” In 1913, the equivalent of $500,000 today would have been more than $14 million. For incomes above $539,000.900, the highest tax rate currently is 37 percent.

This is also true for the alternative minimum tax of 1969 (AMT). The tax was then only applicable to a handful of super-wealthy taxpayers, who were charged with tax avoidance. However, over time, Hoenig explains:

The number of AMT-exempt households increased by price and wage inflation from 200,000 in 1982, to 5.2 millions in 2017. However their actual income was relatively stable. While the tax was temporarily reduced in 2018, after which, it will return to a more severe tax for the middle classes.

Let’s not forget to take care of what we wish for. This tax could inadvertently make you a billionaire.