Sen. Ron Wyden, D-Ore., speaks during a Senate Finance Committee nomination hearing on Feb. 23, 2021.
Greg Nash | Pool | Reuters
Americans increasingly favor a wealth tax on the ultra-rich. But despite a surge in proposals, these policies have had trouble gaining traction.
Biden’s billionaire minimum income tax calls for a 20% levy on homes worth more than $100 million, which is applied to “total income,” including so-called unrealized capital gains or asset growth.
However, like previous estate tax proposals, the plan may struggle to gain broad support, with potential legal issues if enactedpolicy experts say.
The wealth tax proposals came about in response to growing inequality, according to Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
While the federal government previously relied on estate taxes to tax wealth, many of the wealthiest households dodge these taxes through sophisticated estate planning strategies, he said.
“We have some fabulously wealthy American households,” Rosenthal said. “But we’re not collecting that wealth because the estate tax is so porous.”
Furthermore, many of the richest families pay relatively low taxes on income since the tax code favors investment earnings, such as interest, dividends, capital gains or rents.
Currently, the top marginal income tax rate is 37%, while top earners pay 20% for long-term capital gains, plus a 3.8% Obamacare surcharge.
Warren called for an annual “ultra-millionaires tax” of 2% on Americans with a net worth of more than $50 million and 6% on wealth of more than $1 billion to help fund social spending programs.
sanders countered with a more aggressive planwith a tiered approach from 1% for net worths over $32 million to 8% for net worths over $10 billion.
Later, Warren and Sanders, along with other Democrats, introduced the Ultra-Millionaires Tax Act in March 2021, a 3% annual tax on wealth over $1 billion.
“A wealth tax is popular with voters on both sides for good reason: because they understand that the system is rigged to benefit large and wealthy corporations,” Warren said in a declaration.
Some 64% of Americans support a wealth tax on the super-rich, including 77% of Democrats and 53% of Republicans, according to a 2020 study. Reuters/Ipsos poll. However, the plan failed to take hold in Congress.
Recently, there has been a slight shift away from plans that tax wealth directly, with concerns over whether the proposals “will hold up in a court system,” said Garrett Watson, senior policy analyst at the Tax Foundation.
If enacted, courts can argue over what counts as income, as outlined in the 16th Amendment, which codified a national income tax.
The bigger issue, however, is the definition of “billionaire” and the calculation of net worth, legal experts say. The problem is direct taxes it must be divided among the states based on population, which is not possible since some places do not have billionaires.
Senate Finance Committee Chairman Ron Wyden, D-Ore., released a plan for a billionaire tax in October, affecting Americans with more than $1 billion in wealth or an adjusted gross income of more than $100 million for three consecutive years.
The plan called for annual taxes on asset growth, which Wyden insisted was constitutional because taxing capital gains annually is already part of the tax code. But the proposal lost steam among Democrats.
Biden’s budget also calls for a tax on gains from assets at the time of deathwhich was previously eliminated during negotiations on the proposed Build Back Better legislation.
Currently, heirs can delay taxes on inherited growth until they sell the property. They also receive a so-called increase in basis, adjusting the purchase price of the asset to the value on the date of death.
“Right now, these mega-millionaires who have amassed massive amounts of appreciated wealth don’t pay taxes in their lifetime and can avoid paying taxes when they die,” Rosenthal said.
France is one of five members of the Organization for Economic Co-operation and Development that collects tax revenue from net wealth. In the image, the Eiffel Tower in Paris.
Travelpix Ltd | Stone | fake images
The United States is not alone in facing estate taxes; Politicians around the world have fought to implement such taxes and keep them on the books.
In 2020, only five members of the Organization for Economic Co-operation and Development (Colombia, France, Norway, Spain and Switzerland) raised income from net wealth, down from a 12-country high in 1996, according to a Analysis of the Tax Foundation.
In Europe, one of the problems has been the ability to circumvent taxes by moving from one country to another, along with various exclusions, which erodes the tax base over time, according to Watson.
“From a revenue-raising perspective, there wasn’t much success there,” he said.
Over time, a number of countries have repealed net wealth taxes for various reasons, including economic impact, the Tax Foundation found.
Despite the bleak outlook for Biden’s multi-billion dollar minimum income tax, experts believe we will continue to see a resurgence of estate tax proposals.
These proposals are generally popular and likely won’t go away, said John Gimigliano, head of federal legislative regulatory services at accounting firm KPMG.
Generally speaking, many Americans approve of higher taxes on the ultra-rich. Nearly two-thirds support a minimum 20% tax on income over $100 million, as of March 2022 YouGov PLC Survey found.
And about 60% of people worth $1 million or more support an estate tax for people worth $10 million or more, according to CNBC’s 2021 Millionaires Poll.
“The reality is [levies on wealth] they represent such a departure from tax rules,” he said, explaining that it may take time for policymakers to “face” how to make it work politically, including enactment and enforcement.
Still, these ideas may return during the midterms and beyond, even if Biden runs for re-election in 2024, Gimigliano said.
“This proposal would be something he would talk about on the campaign trail,” he added. “I’m very sure of that.”