President Joe Biden is proposing a Billionaire Minimum Income Tax, which would levy a 20% minimum tax rate on U.S. households with net wealth of more than $100 million; its goal is to reduce income inequality and shrink the deficit by approximately $360 billion in the next decade. The problem is that it would force wealthy households to pay taxes on unrealized capital gains from assets like stocks, bonds, or privately held companies.
First off, this is patently unfair. How can you be required to pay taxes on unrealized capital gains when you haven’t actually received the funds? You haven’t generated a profit, and yet you’re paying taxes on it? How is this logical or just?
Larry Summers Agrees
Larry Summers, a noted liberal Harvard economist who served as Bill Clinton’s secretary of the Treasury, has also come out against the billionaire tax. He said: “The billionaires’ tax is a bad idea whose time will never come. It’s mislabeled to give it a kind of populist appeal….The general idea of taxing capital gains when people don’t have those capital gains—they haven’t sold the assets—is not a realistic one.” A higher priority, he says, is enforcing a global corporate tax agreement.
Who Needs the Billionaire Tax When We’ve Got the Estate Tax?
By the way, as someone conversant with tax law, I’d like to point out that the billionaire tax is redundant; we already have this tax. It’s called the estate tax, which is a 40% tax for the privilege of owning assets when you die. To me, it seems that in many ways, the billionaire tax is a pre-payment of estate taxes, but just in another form—and it would be superimposed over the estate tax, bringing an additional tax burden.
Incidentally, there are many ways the ultra-wealthy could evade the billionaire tax, just as they find ways to avoid estate tax, such as by using discounts for family limited partnerships and lifetime transfers to children. Historically, large estates have found ways around the estate tax—and it has all the same issues as this tax would. The wealthy will circumvent this tax, too.
It’s instructive to note that the estate tax carries with it a mitigating provision known as Section 6166, which allows taxpayers to pay the estate tax over 10 years. It’s needed because the estate tax is disruptive; it kills businesses and breaks up farmland, for example. The billionaire tax would be similarly disruptive to economic activity in this country, if not more so.
The Domino Effect
If the billionaire tax becomes law, the economic ripple effect could be fearsome, placing high-net-worth individuals in a corner. Let’s say you’re an investor who’s just been hit with a tax bill for $20 million in unrealized capital gains appreciation. How do you get the cash to pay the tax? How do you pay when you don’t have the cash from the sale of an asset?
To cover their tax bill, those affected by the new law either are going to have to borrow money (in effect, to prepay estate taxes, which would also be deductible for estate tax purposes); issue new stock, which would shift the tax to the middle class, which buys stocks via their retirement accounts and pensions; or sell off assets at a loss because they’re in a bad position.
More important, the billionaire tax potentially would have a devastating effect on family businesses and farms. Why work hard to build something to leave your children if the government is only going to confiscate it? These are the same issues we face with the estate tax.
If the billionaire tax passes, we also know that the taxable wealth limit covered in the legislation, currently set at $100 million, will decrease over time. The result will be that more and more taxpayers will end up paying the tax. Once the government discovers a new source of revenue, it’s not going to relinquish it.
Moreover, I’m concerned about the long-term impact of this wholesale siphoning off of national wealth. Before the law in enacted, investors will be motivated to sell off their stocks in a massive dump, which could risk triggering a stock market crash. And then who is going to be hurt? The American middle class that’s put a lifetime into saving money for 401(k)s and IRAs, which is going to be wiped out because no one will be able to remove funds from their retirement accounts.
You could apply this principle across the board. Who will want to invest in private equity, for example? Savvy investors will get out before the tax goes into law and then invest in safer markets. We’re going to be the highest-taxed developed country in the world.
Punishing the American Investor
As a Tax Foundation article pointed out, the proposal would place a bigger tax burden on U.S. savers; foreign savers would be at a relative advantage because they’d be exempt from the minimum tax. By raising taxes on domestic savers, we’d shrink the amount of domestic saving, so foreign savers would underwrite a bigger portion of U.S. investment opportunities. Eventually, American income will shrink because investment returns will go to foreign savers, not American savers. With this shift in the balance of trade, we’d also see a bigger trade deficit, which is not what we need.
The Danger of Massive Capital Flight
To avoid these onerous taxes, the ultra-wealthy will flee to safer tax havens, just as during the pandemic, we’ve seen the dramatic flight from blue states to red states owing to the difference in tax rates—Californians moving to Texas and New Yorkers gravitating to Florida to escape a demanding tax burden.
As a CPA, I already have many clients who have moved to Puerto Rico strictly as a tax strategy. As we speak, Amazon and Microsoft are building massive facilities in Asia—I think, partially, to avoid future burdensome U.S. taxation. If this proposal passes, the people who will be hurt will be the taxpayers who don’t have the ability to move. So why are we going to hurt the middle class?
Puerto Rico or Ireland?
Right now, you can bet that the Big Four accounting firms are working on this eventuality 24/7 in case the billionaire tax passes. The process has started. CPAs are already meeting with clients and explaining how to move to Puerto Rico and what they need to do before this tax policy goes into place. They’re developing a strategy for clients so if the law passes, they can execute it right away, and their clients can migrate to an offshore tax haven like Puerto Rico or Ireland immediately.
We’re all familiar with the Grimms’ fairy tale of the Golden Goose. Out of greed, the youngest brother slays the magical goose laying the golden eggs to access its unhatched golden eggs (unrealized capital gains, in this case); but of course, he ends up destroying the engine of his wealth. That’s the situation we’re in now. But considering the billionaire tax’s potential for a toxic ripple effect on our economy, I think that’s a possible future we’d like to avoid.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Julio Gonzalez is the founder and CEO of Engineered Tax Services and specializes in national tax reform.
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