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  • Nate Carter

Billionaire Tax: Death of a Very Bad Idea

The Biden Administration and Congress are working to impose new taxes particularly on higher income earners. This includes raising marginal income tax rates and capital gains tax rates. For a brief period these efforts included a new special tax on billionaires. This tax would have been historic, if it passed. It also would have been a very bad idea.

Taxing Assets Not Income

The billionaire tax plan was unique because it breaks with tradition by allowing the Federal government to tax unrealized gains. Essentially, taxing income that has yet to be earned. Income is earned when a transaction occurs such as receiving a payment like a paycheck or selling an asset and realizing a gain. For example, you sell $300 in GM stock bought for $100, and you have a realized gain of $200. The Federal government taxes this $200 gain. However, the billionaire tax wanted to tax assets that have not been sold and therefore have not earned any income. This is an extraordinary overreach by the Federal government and sets a dangerous precedent for all investors, not just billionaires.

Taxing Certain "Tradable" Assets

The billionaire tax plan, if passed, would have only applied to “tradable” assets. This means assets like stocks, bonds, exchange traded REITs, or cryptocurrencies. It probably would not apply to collectibles like artwork which are a form of investing for some people or many categories of real estate like apartment building or single family homes. The 107 page plan was not clear on all these details.

Billionaire Tax Example

Here is how the billionaire tax would work in practice. If Kate bought $1,000 in Tesla stock which has increased in value to $11,000 the Federal government would tax this $10,000 gain. Kate would pay a tax of 23.8% or $2,380 on the $10,000 in appreciation, even though she never sold her shares. She would also expect some type of tax credit if her stock fell in value next year.

Only Taxing Billionaires...For Now

Initially the billionaire tax would only apply to the super wealthy, about 700 taxpayers who earned over $100 million a year for the past three years or who have more than $1 billion in assets. But, keep in mind, the Federal government is making a revolutionary shift to taxing assets instead of income. And once the Federal government creates a new tax it can impose it on more taxpayers. The Federal income tax did not exist until 1861 when it was created to pay off the expenses of the American Civil War. The cost of the war was paid off buy the tax was never repealed.

Taxes Cause Unintended Consequences

New taxes often create unintended consequences. The super wealthy are smart enough to implement tax advantageous strategies such as moving away from holding "tradable" assets like stocks subject to the billionaire tax to "non tradable" assets like real estate that do not. The tax would create major market disruptions. It could lead to a significant decline in stock prices, where most average households hold their retirement accounts, while also causing a spike in real estate prices at a time when housing is already unaffordable in many cities.

More Bad Tax Ideas May Be Coming

Taxes work best when they are equitable, understandable and predictable. The easier it to comply with a tax, the less of a time and financial burden it becomes on taxpayers. Predictable taxes, which do not depart with the norm, also allow investors and the private sector to anticipate future tax rates and invest capital effectively. There are intelligent ways to improve the tax system to ensure wealthy households pay their share, but the billionaire tax was not one of them. As Congress struggles to raise taxes on the wealthy expect to see more ill-conceived tax proposals that create unintended consequences in the future.

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