Biden Administration Proposes ‘Billionaires Minimum Tax’

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Biden Administration Proposes ‘Billionaires Minimum Tax’

The Biden Administration proposed a minimal tax on highly affluent people in its FY 2023 budget on March 28, 2022. The so-called “billionaires minimum tax” would levy a 20% tax on total income—generally including unrealized capital gains—on taxpayers whose wealth, calculated as the net of asset values minus liabilities, exceeds $100 million for tax years starting after December 31, 2022. (Because $1 billion equals $1,000 million, the term is rather misleading.) According to the Office of Management and Budget (OMB), the tax will generate more than $360 billion in revenue over a ten-year period.

Key Takeaways

  • President Biden wants a 20% minimum tax with a wealth tax on anyone with more over $100 million in assets.
  • Taxpayers liable to the new minimum tax may choose to pay it over time.
  • Wealth taxes are opposed, although they have the strong backing of U.S. Senators Elizabeth Warren and Ron Wyden, the head of the Senate Finance Committee, which has authority over taxation.
  • The Biden Administration will also tax unrealized gains on gifts, bequests, and other asset transfers, and eliminate stepped-up basis on death to prevent permanent tax evasion.

Minimum Tax Design: Regular Income Plus Unrealized Gains

The new minimum tax would be levied yearly on the entire income, including regular income and unrealized gains on investment assets, of ultra-wealthy persons with net assets worth more than $100 million. This scheme includes a kind of wealth tax. The new tax would be levied on the difference between the taxpayer’s current income tax and the new 20% minimum tax.

A taxpayer whose normal income tax burden exceeds the amount required under the 20% minimum tax would be exempt from the new minimum tax. The idea phases in the minimum tax such that the whole tax applies to persons with more than $200 million in wealth. Taxpayers’ contributions would be credited as prepayments against the tax burden that would otherwise be owed upon asset sale.

Taxpayers are not compelled to regard their minimal tax due as an amount for which they must pay estimated tax. Furthermore, the preceding year’s minimum tax due would be eliminated for calculating the safe harbor from penalties for underpayment of anticipated tax the following year.

Transition and Offsets

Taxpayers who are liable to the new minimum tax may choose to pay their first-year payment in nine equal yearly installments. In future years, taxpayers might choose to pay the yearly minimum tax in five equal annual payments.

The plan acknowledges the fact that asset prices change and reconciles any excess payments on unrealized appreciation when assets are transferred in a taxable sale. If the eventual tax owing on asset dispositions is less than the owners’ prepayments and credits for the minimum tax, the excess payments and unused credits will be refunded.

The credited prepayment amount would be computed as the minimum tax payment at the 20% tax rate, less unrefunded, uncredited prepayments, and regular income tax. Uncredited prepayments equal the taxpayer’s cumulative minimum tax burden for preceding years less amounts credited against prior-year realized capital gains.

  Tax Efficiency Definition

Asset Valuation

The assessment of assets subject to the tax is a fundamental problem in the design of a wealth tax. Treasury Secretary Janet Yellen has previously highlighted worries about the technical and administrative constraints of valuing assets that do not have a public market.

The valuation problem is addressed in Biden’s plan. It would calculate the value of “tradable” assets, such as shares, on December 31 of the calendar tax year. Non-tradable assets’ worth would be the larger of their original or modified cost basis, or their value as of the most recent valuation event based on investment, borrowing, or financial statements; alternatively valuations might employ procedures defined by regulations. Annual valuations would not be necessary; instead, values would be updated based on the five-year Treasury rate plus two percentage points.

Related Biden Tax Proposals

In addition to taxing certain affluent taxpayers’ unrealized gains, the Biden Administration is pursuing other reforms that would make some previously untaxed property transactions taxable and raise taxes on high-income taxpayers’ investment income. Some of these measures would have a considerably lesser impact on taxpayers than the wealth tax outlined above.

Expansion of Taxable Transfers: Gifts and Inheritances

The Biden Administration’s revenue initiatives involve a significant shift in the handling of some property transactions. Transfers of property through gift or death are not recognized as taxable realization events under current tax regulations. Gift receivers get a carryover basis in the donated property, while beneficiaries of a deceased receive a tax basis increased to fair market value.

Individuals’ transfers of appreciated property by gift or death would constitute taxable events if the proposed amendment is implemented. The difference between the property’s tax base and its fair market value would be subject to taxation. The new regulation would also apply to transfers of property by noncorporate organizations that has not been subject to tax on its appreciation since December 31, 1939. Transfers to and from trusts (other than grantor trusts) would likewise be taxed, and partial interests in appreciated property would normally result in a tax equal to the interest.

Transfers of property to a spouse or charity are free from these regulations, but the basis is carried forward. Other contributions of appreciated property are granted a lifetime exclusion of $5 million per donor (in addition to the normal gift exclusion); any unused amount of this exclusion during the donor’s lifetime is allowed for the donor’s estate. Furthermore, taxation on unrealized appreciation in family-owned and run firms would be postponed until the company is sold or ceases to be family-owned and operated. When such enterprises are eventually taxed, they will be given a 15-year payment schedule.

  Tax Loss Carryforward

Rate Increase: Gains and Dividends of High-Income Taxpayers

Furthermore, the proposed modifications would raise the tax rate on long-term capital gains and eligible dividends for people with taxable income above $1 million from 20% to 39.6%. If this person is also subject to the 3.8% net investment income tax, the total rate is 43.4%.

Goal: Improve Tax Equity

The Administration’s minimum tax plan aims to alleviate the disparity in individual tax burdens caused by the current federal income tax system. The present handling of unrealized profits, in example, rewards very rich taxpayers disproportionately. According to the Administration, US billionaires paid a tax rate of around 8% on their income between 2010 and 2028, while many lower-income households paid significantly higher rates. The wealthiest taxpayers pay low tax rates since the majority of their wealth is derived from unrealized capital asset appreciation, while middle- and lower-income families rely on wage and salary income, which is taxed yearly at graded rates.

If rich people sell appreciated assets, the highest capital gains rate is now 20%, plus a 3.8% net investment income tax for some. As a result, their total capital gains tax rate is lower than the 37% income tax rate on wages, salaries, and other regular income. Furthermore, the wealthy do not need to sell their things to support their lifestyles; they may access substantial cash by borrowing against the worth of their assets. If they do not sell of their assets before death, their heirs acquire them with a tax basis stepped up to fair market value, and the appreciation is tax-free forever.

Furthermore, the Administration maintains that the current laws, which tax gains in value solely upon asset sale, result in economic inefficiencies. It encourages taxpayers to keep assets forever in order to avoid capital gains tax, rather than reinvesting their wealth in more productive enterprises.

Prospects for Enactment

The chances of enacting a new tax designed as—or incorporating—a wealth tax are bleak. The mismatch between the low tax rates paid by many of the richest taxpayers and the higher rates imposed on lower-income taxpayers has sparked significant criticism. Wealth tax measures, on the other hand, have proved contentious, attracting formidable opponents.

Under the current Congress, the Biden plan would need the votes of all Senate Democrats to pass even in the budget reconciliation process, which typically takes just a majority of 51 votes to approve legislation. The proposal’s passage this year is hampered by the parliamentary schedule and midterm elections. And, since budget legislation often take months to pass even in non-election years, the proposed minimum tax may not be addressed until after a new Congress is elected in in early 2023, if at all.

Other Wealth Tax Proposals: Senators Warren and Wyden

A wealth tax, although contentious, has some staunch legislative advocates. A wealth tax is proposed by two current Senators. Both of these proposals vary from Biden’s.

  Tax Preference Item

Senator Warren: Annual Tax on Net Asset Value

Senator Elizabeth Warren has long advocated for a wealth tax and has sponsored legislation that would levy an annual 2% tax on the net value of assets worth more than $50 million. In the event of taxpayers with assets worth more over $1 billion, the rate would rise to 3%.

The Warren plan would tax all assets includible in an individual’s estate except tangible personal property worth $50,000 or less, regardless of debt due on the property. The methods of valuation are not mentioned, but would be established by Treasury rules.

Senator Wyden: Tax on Annual Increase in Value

Senator Ron Wyden, who leads the Senate Finance Committee, which oversees tax policy, is also a vocal supporter of a wealth tax. Senator Warren’s proposal would tax the whole value of a taxpayer’s assets on an annual basis, but Senator Wyden’s proposal would tax the yearly growth in asset prices of taxpayers whose net worth surpasses $1 billion or income exceeds $100 million for three consecutive years.

Senator Wyden proposes to levy a tax of 20% on the yearly growth in value of a taxpayer’s “tradable” assets, such as stocks, whose valuations are established and disclosed to the owners on an annual basis. Non-tradable assets would be subject to a special “deferral recapture” tax upon transfer, whether by sale, gift, bequest, or trust transfer. This plan would effectively tax some currently non-taxable property transactions. The Wyden plan would also preclude permanent tax evasion by enforcing the deferred recapture rule on bequests.

The extra tax on asset disposal would be framed as a form of interest rate, levied for the years the assets are kept and decided by the short-term rate on selected US Treasury securities + 1%. The Wyden draft bill has extensive technical provisions for dealing with pass-through corporations, transitions, life insurance and annuities, and tax-favored transactions and investments.

The Bottom Line

President Biden’s proposal is his first support for a wealth tax, a measure that is certain to attract opposition. Those impacted by the proposed minimum tax and rate increases affecting very rich and high-income taxpayers are likely to oppose them. The larger, related changes, including the characterization of presently tax-free property transfers as taxable transactions and the effective abolition of “stepped-up basis” upon death, may have a bigger impact and may be disagreeable to many.

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