Wednesday, October 27, 2021
To help fund President Biden’s Build Back Better program, Democratic leaders in Congress appear to have abandoned the idea of raising tax rates for high-income corporations and individuals. Instead, they’ve got their hands on their bag of tax tricks and can come up with a 15% minimum corporate tax as well as a billionaire tax. While the corporate minimum tax is justifiable, the billionaire tax is fraught with uncertainty.
The proposed wealth tax would require billionaires and those who earn more than $ 100 million a year for three consecutive years to pay income tax on unrealized capital gains. Concretely, this levy would impose capital gains on physical and financial assets, whether the taxpayer has sold them or not.
Proponents argue that this tax on around 700 billionaires would make the tax system fairer. They point out that wealthy taxpayers can borrow against the value of their assets to make purchases and do not pay taxes on these loans because they are not classified as income.
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There may be some truth to this argument, but as Rep. Richard Neal (D-MA), chairman of the powerful House Ways and Means Committee, acknowledged that the billionaire tax could be a logistical nightmare.
Some of the unanswered questions regarding this tax proposal are as follows:
How will the IRS value non-financial assets? Applying the tax to non-financial assets such as intellectual property, works of art, and jewelry is subjective and would pose difficult administrative problems for the IRS.
The National Review reported that Steven Rosenthal of the Liberal Tax Policy Center “pointed out how easy it might be to estimate the growth of financial securities (stocks, bonds, mutual funds, exchange-traded funds, etc.) and even of real estate, but it’s much more difficult when it comes to things like intangibles, closely held businesses, works of art and collectibles, etc.
What legal tax avoidance strategies will be played out? For example, what would prevent billionaires from distributing assets among family members?
How would the IRS treat asset impairment losses? Will the taxpayer be able to carry forward losses to offset future gains, and at what levels?
These questions show the complexities of collecting and collecting a billionaire tax, which, therefore, is likely to have unintended consequences. As the Wall Street Journal editorial, “Complexity is one reason why European countries, including France, Germany and Sweden, have abandoned broad-based wealth taxes. Many of the wealthy have dodged wealth taxes by exploiting exclusions or moving out. “
However, the biggest obstacle to taxing a billionaire’s unrealized capital gains is its questionable constitutionality, which will undoubtedly lead to legal challenges. The Sixteenth Amendment to the United States Constitution authorized the federal government to impose income tax. He predicted that “Congress shall have the power to levy and collect taxes on income from all derived sources.” The question that the courts will have to decide is whether or not unrealized capital gains are taxable income?
There are precedents and case law in this area. In Eisner v. Macomber (1920), as noted by Joe Bishop-Henchman of the National Taxpayers Union, the highest court in the land declared that it was unconstitutional to base a tax on the increase in the value of shares which had no not actually sold. The Supreme Court concluded that “the mere growth or increase in the value of a capital investment is not income”.
To be successful, President Biden’s Build Back Better program must have a solid fiscal foundation. A billionaire tax can be a tax foundation built on sand.
Gary Sasse is the founding director of the Hassenfeld Institute for Public Leadership at Bryant University