During last fall’s negotiations in Congress over President Biden’s ill-fated “Build Back Better” package of social, environmental, and labor legislation, Senate Democrats put forward an intriguing plan for a new tax on the very wealthy. The proposal, which would have applied only to a few hundred of the highest net-worth Americans, called for treating “unrealized capital gains” as taxable income. Unrealized capital gains are the increased value of investment assets that are held without being sold. The proposal was presumably designed to win the support of the inscrutable senior senator from Arizona, Kyrsten Sinema, who had previously declared her opposition to any increase in personal or corporate income-tax rates.
Whether anything can win the support of Sinema—or of her fellow Senate enigma Joe Manchin—remains to be seen, but the Biden administration appears to be keeping hope alive. As part of his budget proposal for the next fiscal year, intended as a starting point for a new round of negotiations over his domestic priorities, President Biden has unveiled a new “Billionaire Minimum Income Tax” (BMIT) that resembles the Senate Democrats’ idea from last autumn. Any taxpayer with a net worth of more than $100 million—around one one-hundredth of 1 percent of American households—would pay at least 20 percent of their “full income” in federal taxes, where full income is defined to include unrealized capital gains. For example, someone with a net worth over $100 million who bought stock worth $1,000 in January 2021 and saw its value increase to $5,000 by the end of the year would have owed taxes in 2022 on the $4,000 difference, even if they never sold the stock. (Someone worth less than $100 million who engaged in the same transaction would have owed nothing.)
The objective of such a policy is to ensure, in the administration’s words, that “the wealthiest Americans no longer pay a tax rate lower than teachers and firefighters.” Because income taxes are currently assessed only on realized capital gains—or the difference between the value for which an asset is sold and the price at which it was purchased—many among the ultra-rich are able to evade taxation by never actually selling their assets. Instead, they obtain whatever income they need for consumption by taking out loans secured by their holdings—and paying these off with other loans later. Since interest payments on these loans are often less than what would be owed in capital gains taxes, it can be highly lucrative for the very wealthy to pursue a tax-avoidance strategy that allows them to “buy, borrow, and die” without ever owing anything.
Still, the BMIT is intended to be a kind of income tax, and does not go as far as taxing the underlying wealth itself, a policy advocated in recent years by figures like Sen. Elizabeth Warren and Sen. Bernie Sanders. Nevertheless, the recent discussion around wealth taxes has no doubt helped to shift the Overton window far enough to put the notion of taxing unrealized capital gains well within the mainstream of Democratic policy discourse.
The BMIT raises some of the same questions that would be faced by a wealth tax, such as how to value assets that are not publicly traded, like ownership stakes in private companies, or how to pay taxes on illiquid wealth that cannot easily be turned into cash. Manchin, for his part, has already complained that you “can’t be taxed on things you don’t have,” or that you might have only “on paper.” Oddly, no one ever seems to raise this objection against the concept of property taxes, which are nearly ubiquitous and assessed on illiquid assets (houses and land). Critics of wealth-tax proposals have also charged that they are probably unconstitutional, since the Constitution prohibits “direct taxes” on individuals and the federal income tax is only permitted because of the Sixteenth Amendment, ratified in 1913. Even if public support for taxing the wealthy more aggressively remains high, a BMIT would almost certainly attract legal challenges based on the theory that unrealized capital gains are not truly “income.”