This week in Bidenomics: Those slippery billionaires

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Could you please feel outraged? Again?

For the last 10 or 20 years, politicians, mostly Democratic, have been trying to point out some vast inequities in the U.S. tax system. In 2011, President Obama proposed the “Buffett rule,” which would require billionaires such as Warren Buffett to pay taxes at the same rate as middle-class workers. Buffett has long pointed out that he pays a lower tax rate than his secretary, because of the wide disparity in tax rates on regular income and on gains from investments.

The Biden administration this week amplified the case for more aggressive taxation of billionaires. Biden's Office of Management and Budget posted a new analysis on Sept. 23 claiming the richest families in American pay just 8.2% of their income in taxes. Prior studies of this sort have ­­estimated that the wealthiest Americans pay an effective tax rate of 24% to 27%, so it sounds as if billionaires have found new ways to shave their tax bills. The average for all taxpayers is around 14.3% of income paid in federal income taxes.

VAN HORN, TEXAS - JULY 20: Blue Origin’s New Shepard crew (L-R) Wally Funk and Jeff Bezos walk together after flying into space in the rocket on July 20, 2021 in Van Horn, Texas. Mr. Bezos and the crew were the first human spaceflight for the company.   (Photo by Joe Raedle/Getty Images)
VAN HORN, TEXAS - JULY 20: Blue Origin’s New Shepard crew (L-R) Wally Funk and Jeff Bezos walk together after flying into space in the rocket on July 20, 2021 in Van Horn, Texas. Mr. Bezos and the crew were the first human spaceflight for the company. (Photo by Joe Raedle/Getty Images)

The Biden analysis, however, has one novel feature: It counts gains on investments as income, even if the owner has not sold those assets and actually profited from the sale. This might sound arcane, but it’s not. I looked at my own retirement and investment accounts and realized that I, too, have unrealized capital gains I haven’t paid taxes on. (For anybody wondering, I’m not a billionaire.) Most Americans with any type of investment account have racked up unrealized capital gains during the last year or two, since stocks have registered blistering returns. But you don’t owe taxes on those gains until you sell the assets, and even then some lower-income Americans don’t owe capital-gains taxes.

Biden’s economists are clearly trying to rile up ordinary taxpayers to raise pressure on Congress to boost billionaire taxes. But Biden himself isn’t fully on board and Democrats in Congress already have cold feet. The key issue is that the federal government taxes income from work and income from investments quite differently. The top tax on labor income is 37%, and Biden wants to raise it to 39.6%. The top tax on capital gains is 20%. Biden wants to raise that to the same level as labor income—39.6% for top earners.

Some Democrats, including Sens. Bernie Sanders and Elizabeth Warren, want to go further by imposing an annual wealth tax on multimillionaires, whether the owner sells the assets or not. Biden opposed a wealth tax during the 2020 president campaign, but he said recently he supports the idea. But that doesn't make it a good idea. As simple as it might sound, a wealth tax would be very difficult to administer and some legal experts think it could be unconstitutional. Raising other taxes already on the books would be more practical and less vulnerable to an inevitable legal challenge.

There’s a more straightforward way to get the revenue a wealth tax would supposedly generate using taxes that already exist. The first step would be to do what Biden wants and raise the top capital gains rate to the same level as the top income tax rate. Under Biden’s plan, the higher capital gains rate would only apply to taxpayers with more than $1 million in income.

Holding onto assets until death

There’s an important second step, though, which would eliminate the current incentive to hold investments indefinitely and never pay taxes on capital gains. Current law requires no capital gains tax paid on assets held when the owner dies. Instead, all capital gains are wiped out, tax-wise, and the base value is reset at whatever the new value of the asset is. If a wealthy investor bought stock for $1 million and it’s worth $5 million when he dies, the capital gain is $4 million. But nobody owes tax on that $4 million, as long as the owner never sold the stock while he was alive.

Whoever inherits the stock now starts with a base value of $5 million, and will only owe capital gains tax if he sells it. If the value of the stock rose to $10 million and the inheritor sold it, he'd owe tax of 20% on a gain of $5 million, or $1 million in tax. But if the inheritor died with the stock unsold, there’s still no capital gains tax and the base value resets at $10 million, and so on. Meanwhile, the owners of the asset can use it as collateral for low-interest loans and other streams of income they owe little or no tax on. If the system is “rigged,” that’s one way how.

President Joe Biden speaks about the COVID-19 response and vaccinations in the State Dining Room of the White House, Friday, Sept. 24, 2021, in Washington. (AP Photo/Patrick Semansky)
President Joe Biden speaks about the COVID-19 response and vaccinations in the State Dining Room of the White House, Friday, Sept. 24, 2021, in Washington. (AP Photo/Patrick Semansky)

Biden wants to change the law so wealthy Americans owe taxes on capital gains when the owner dies, whether the estate sells the assets or not. Since Biden would also raise the capital gains rate to 39.6%, this would eliminate any tax benefit to holding onto assets until death. The capital gains tax would be the same whether the owner sold before he died or passed the assets onto heirs. The Tax Policy Center estimates these measures combined could raise more than $50 billion in new revenue per year. That's a lot.

But wait. The House Ways and Means Committee has published a blueprint of the tax changes Congress might pass as part of the big spending bill they’re hoping to pass—and it goes pretty easy on billionaires. Democrats would raise the capital-gains tax for the wealthy to just 25%, rather than the 39.6% Biden wants. And there’s no mention of applying the capital gains tax to assets held at death. The OMB economists can’t even sell their message to fellow Democrats in Congress.

The Ways and Means tax plan could change as the House lawmakers craft final legislation and then negotiate with their colleagues in the Senate. But the House typically puts forth more radical legislation than the Senate, which suggest that if anything, the Ways and Means tax proposals will get watered down even more. This reflects a couple of things: One, the banking and investing lobbies have formidable power to protect their interests, and two, it's difficult to pass any tax hikes, on anybody. It doesn’t help that Democrats hold wafer-thin majorities in both houses and can scarcely lose a single vote.

UNITED STATES - SEPTEMBER 14: Rep. Mike Thompson, D-Calif., attends the Ways and Means Committee markup of the Build Back Better Act in Longworth Building on Tuesday, September 14, 2021. Reps. Earl Blumenauer, D-Ore., and Linda Sanchez, D-Calif., also appear. (Photo By Tom Williams/CQ-Roll Call, Inc via Getty Images)
Rep. Mike Thompson, D-Calif., attends the Ways and Means Committee markup of the Build Back Better Act in Longworth Building on Tuesday, September 14, 2021. Reps. Earl Blumenauer, D-Ore., and Linda Sanchez, D-Calif., also appear. (Photo By Tom Williams/CQ-Roll Call, Inc via Getty Images)

It makes one wonder: If the Biden administration presented evidence showing billionaires paid nothing in taxes, would it change anything? What if billionaires were actually getting tax rebates funded by factory workers and fast-food clerks? Would there be impetus then to raise the taxes on easy money and inherited wealth? Maybe that kind of pressure will materialize in time, but no revolution seems imminent.

Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.

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