There has been much discussion on potential tax changes recently, in an attempt to fund their social spending and climate bill. Even as the price tag on the bill itself has decreased, there have been many revisions made cutting certain revenue-generating taxes already proposed. Most recently, Senate Finance Committee Chairman Ron Wyden proposed for a new kind of capital gains tax to be input into Biden’s legislation, which has been dubbed by many as the “Billionaires Tax”.
New Proposed Plan
Ron Wyden’s 107-page plan would specifically target roughly 700 billionaires and their unsold publicly traded assets. The Senate’s reaction in coming days will determine if this tax will advance to the next steps or if it will wind up being thrown out like many of the other tax proposals we’ve seen come across the table to this point.
Who Does This Really Apply to?
This proposal would effectively eliminate billionaires’ ability to defer capital-gain taxes indefinitely, allowing for these unsold assets to be taxed for government revenue. If this tax is passed, it would start in 2022 and apply to people who have a net worth of over $1 billion or with an annual income over $100 million for three consecutive years prior. They would also stay within the group being taxed unless they had 3 consecutive years in which they do not meet the thresholds.
How Would this Tax Work?
As this system starts it would first tax those qualifying as if they sold their publicly traded assets. For example, if someone had bought $1 billion worth of stock in 2010, that appreciated to its current state of $10 billion, would have the $9 billion difference added to their income for the year. This $9 billion would then be taxed at the top capital gains rate of 23.8%, equaling out to roughly $2.1 billion in initial taxes. Following this initial tax, there would be a levy on the gain in value from that specific year, meaning there would be significant decreases in the taxed amount. Unrealized losses will be allowed to be carried forward to offset future gains or carried backward to offset past gains and claim refunds.
There would be a separate set of rules applied to nontraded assets like real estate and businesses, which would not be subject to annual taxes to avoid the difficulty in assessing the value annually. These assets would instead be taxed as capital gains when sold, transferred, or upon death. This could create a preference of these types of assets over publicly-traded stock because of the ability to defer real estate and business tax; however, the Wyden plan includes an interest charge in an attempt to level this playing field, which would have a total tax cap at 49% of gain in value.
Additional Rules
To further secure tax dollars from these wealthy individuals, a series of rules were added to limit billionaires’ ability to escape the tax. One example of these other rules is related to gifts, which would trigger a capital-gains tax, except between spouses or when being donated to charity. Trusts would also be subject to these taxes if they hold over $100 million in assets or $10 million in income.
Will this Pass?
We cannot be certain if this tax will pass, but we can be sure of one thing: heavy legal challenges. These will take place for a logical reason; these ultrawealthy would prefer to spend hundreds of millions of dollars in legal expenses to derail this tax than the billion they would incur in taxes if it passes.
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