How Democrats Will Tax Billionaires to Pay for Their Agendas

WASHINGTON — Senate Democrats plan to tax the richest of the rich, hoping to extract hundreds of billions of dollars from the mountains of wealth where billionaires sit to help pay for social safety nets and climate change policies.

NS billionaires tax It would almost certainly face court challenges, but given the blockade of more traditional tax rate increases imposed by Arizona Senator Kyrsten Cinema, Democrats have no choice but to fund their local agenda.

It would tax billionaires for the first time on unrealized gains in the value of their liquid assets, such as stocks, bonds, and cash, which could grow for years as huge deposits of capital that could be borrowed to live virtually tax-free.

NS tax will be charged Anyone with more than $1 billion in assets or more than $100 million in income for three consecutive years—about 700 people in the United States. Initially, legislation would impose a 23.8 percent capital gains tax on gains in the value of billionaires’ tradable assets, such as stocks, bonds, and cash, based on the original prices of those assets.

For guys like Facebook founder Mark Zuckerberg, Amazon founder Jeff Bezos, and Tesla founder Elon Musk, the hit would be enormous as their stocks had zero initial value. They would have five years to pay this amount.

After that, these billionaires would face an annual capital gains tax on the increase in the value of their tradable assets during the year.

Democrats say the billionaire tax could be one of the most politically popular elements of the social safety net and climate change bill, which is expected to cost at least $1.5 trillion and could be completed Wednesday.

“I think there’s an absolute understanding that, in a time of tremendous income and wealth inequality, when you have people like Jeff Bezos in a given year, without paying a dime in federal income taxes, these guys are going to have to start. They pay their fair share,” said Vermont independent Senator Bernie Sanders.

However, it can be difficult to implement. Billionaires avoided taxes by paying very low salaries while accumulating wealth in stocks and other assets. They then borrow these assets to finance their lifestyle, rather than selling the assets and paying capital gains taxes.

This type of tax avoidance can be adapted to the new system, for example, by shifting wealth from tradable assets such as stocks to less liquid assets such as real estate or companies. Such non-tradable assets would not be taxed annually, but the Democrats’ tax proposal to deter capital flight from stocks and bonds would impose a new burden of interest on them, which would be paid when those assets were sold. current capital gains tax.

The interest fee will be equal to the federal short-term interest rate plus one percentage point – currently 1.22 percent total – and will be charged on the gain in the value of the asset accrued over the course of one year.

The proposal will make it easier for billionaires to switch to the new system with the first five years to pay the first bill. They may also consider up to $1 billion of tradable stock in a single company a non-tradable asset to ensure that the founders of a company can retain their controlling interest.

But the proposal also includes a set of provisions that will ensure that billionaires do not avoid paying new taxes by chipping in assets in pass-through companies such as partnerships, hiding them in trusts or giving them to family members.

For example, any gift or bequest that does not go to a spouse or charity will be considered a taxable event, subject to capital gains tax.

The plan is facing resistance from some Democrats, who worry it will not be viable and may be vulnerable to legal and constitutional challenges. The Constitution gives Congress broad powers to impose taxes, but “direct taxes” – a term with no clear definition – must be apportioned among the states so that each state’s residents pay a share equal to their share of the state’s population.

The 16th Amendment clarified that income taxes do not need to be apportioned, and proponents of the billionaires’ tax were careful to portray it as a tax on income, not wealth.