The billionaire tax, explained | Fortune

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In his second State of the Union address, President Biden spoke at length about the state of the economy, and as part of his economic agenda, he urged lawmakers to pass his billionaire tax proposal—a plan that aims to raise the minimum tax rate levied against America’s ultra-wealthy.

“This minimum tax would make sure that the wealthiest Americans no longer pay a tax rate lower than teachers and firefighters,” the White House said in a press release earlier this week. According to the statement, billionaires pay an average tax rate of just 8% in a given year. 

What is the billionaire tax?  

The Billionaire Minimum Income Tax will require that America’s wealthiest households pay a tax rate of at least 20% on their full income, including unrealized appreciation (more on that later). The tax will apply only to the top one-one hundredth of one percent (0.01%) of American households (those worth over $100 million). 

How does this differ from the way our tax system is currently set up?

Well, this tax would apply to billionaires’ income and unrealized gains from stocks, bonds, and other assets.  If a wealthy household is already paying 20% on their full income, including standard taxable income and unrealized income, there will be no additional tax. If tax-free unrealized income allows a wealthy household to pay less than 20% on their full income, the proposal would call on those households to pay additional taxes to bring their effective rate to 20%. 

“Net unrealized gains is the key here,” says Steve Wittenberg, Director of Legacy Planning at SEI Private Wealth Management. “This would be a tax on investments that are not sold yet. It would force ultra-wealthy Americans to pay taxes on the appreciation of their investments on an annual basis.” 

What the billionaire tax means for non-billionaires 

The aim of this proposal isn’t solely to level the playing field for taxpayers in every tax bracket, but also reduce the federal deficit in the next decade by an estimated $360 billion. While the federal budget deficit fell to $1.4 trillion for the 2022 calendar year, the total deficit currently stands at $421.41 billion for its fiscal first quarter of 2023. 

The problem: When the government is having a hard time managing its finances, it has less available in its budget to pour back into the economy, and this can trickle down to middle class Americans in the form of slower economic growth, a strained job market, underinvestments in important social spending programs, and more. 

According to the Committee for a Responsible Federal Budget (CFRB), interest payments on the national debt are projected to become the largest government expenditure within the next few decades, which could severely impact the Fed’s ability to invest in new programs and initiatives. 

“The implementation of a billionaire tax would benefit everyday consumers by creating more jobs and reducing the wealth gap in society,” says Miles Brooks, Director of Tax Strategy at CoinLedger, a cryptocurrency tax software. “The ultra-high-net-worth households often hold their income in investment positions to avoid paying taxes. Taxing wealthy individuals will give the government more resources to invest in building highways, provide quality health care, and build middle-class consumers who drive economic growth.”

Where do things stand now? 

The billionaire tax is still just a proposal and it’s unclear when it could potentially be passed—if ever. When the bill was first proposed by Democrats in 2021, it was met with opposition from Republican lawmakers and A-list billionaires, including Elon Musk who took to Twitter to express his discontent and highlight the potential slippery slope of taxing unrealized capital gains on other investments held by average investors. 

More recently, other politicians including Representative Eric Swalwell (D-CA), Senator Elizabeth Warren (D-MA), and House Speaker Kevin McCarthy all weighed in on Biden’s proposed tax changes. 

As far as how this proposal will fare in Congress, experts think it will likely be an uphill battle. 

“The tax on unrealized gains feels like a bit of a stretch to me,” says Wittenberg. “It would likely face challenges, possibly constitutional ones if passed, and would create many reporting issues and audit issues for an already overburdened IRS. It would be a very tough sell.”





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