Wyden’s new income tax for billionaires

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Senate Finance Committee Chairman Ron Wyden has released a draft of his unrealized gains tax proposal on billionaires (estimated at less than 1,000 taxpayers in the United States). Currently, there is no income tax on the increase in the value of an asset. The increase in the value of an asset is only taxed when the asset is sold, and the gain is both realized and recognized. Mr Wyden’s bill would create a new tax for the super-rich on their publicly traded securities (like stocks, bonds and mutual funds). Each year, the value of these securities would be “valued at the market” and the capital gain would be taxed at the rate of 23.8% of long-term capital gains. If there was a net decrease in the value of publicly traded securities, the loss could be carried back three years to create a payback (only to the extent of prior mark-to-market gains).

Billionaire’s assets that do not have an easily determinable market value would not be subject to mark-to-market tax due to the difficulty in valuing these assets and the lack of cash to pay the tax. Instead, non-publicly traded assets (such as real estate, art, and private companies) would be subject to a new tax at the time of the asset’s sale, thereby eliminating the problems of valuation and liquidity. The tax would be calculated assuming that the recognized income was earned and taxed pro rata throughout the holding period and subject to an interest charge (at the same rate as that charged for the underpayment of tax ). The cumulation of the capital gain tax and the interest charge would be capped at 49% of the capital gain. The illiquid asset tax would not apply to charitable contributions but would apply to most other forms of asset transfer.

The date of entry into force of the bill is January 1, 2022. Elon Musk’s income tax for 2022 could rise to more than $ 60 billion according to this proposal! The bill would allow payment of the initial year tax over five years, which could limit market disruption due to the forced sales required to pay the tax.

Advantages

The additional costs to government and taxpayers associated with collecting the tax would be minimal. The tax would apply to a very small number of taxpayers. It is easy to calculate the value of publicly traded securities. Cheating would also be difficult due to the availability of third party reporting sources. Affected taxpayers may need to sell assets to pay the tax, but since the securities are publicly traded, there would be a market in which to sell. Large amounts could be collected from a small number of taxpayers who can afford the tax. In practice, it is difficult to tax this income. But when they are limited to publicly traded securities of a small number of taxpayers, the practical problems are dispelled.

Disadvantages

High net worth taxpayers whose wealth does not come from publicly traded securities may be uncertain whether they are subject to the proposed tax. The tax applies to taxpayers whose net worth exceeds $ 1 billion for three consecutive year-ends (also to taxpayers whose adjusted gross income exceeds $ 100 million for three consecutive years). Taxpayers with net worth close to the threshold may need to hire appraisers to assess their non-public assets each year to determine whether they think they are subject to tax. Even then, the IRS, in hindsight, may question the decision of taxpayers who claim not to be subject to tax.

One can challenge the fairness of the taxation of publicly traded securities differently from other increases in wealth. Would this change the relative valuations of listed and unlisted assets and discourage investment in more liquid assets? Very successful private companies would be much less likely to have an IPO or merge with a publicly traded company if this proposal were to pass. There would be a divergence of interests between entrepreneurs who have less reason to access public markets and venture capitalists who want a liquidity event. This is especially true for partners such as pension plans, foundations and other investors who do not pay tax on their earnings. Undoubtedly, there are many more economic consequences for private companies which delay access to public markets.

Another concern is market liquidity. Even with publicly traded securities, selling an unusually large block of shares in a short period of time can lead to market disruption. Company founders often own a significant percentage of the company’s shares, even when they are traded on the stock exchange. On death, the law on inheritance rights authorizes a “blocking discount” in the valuation of public securities. Ignoring the lock-in discount would result in a value tax that doesn’t really exist. Since the tax would only apply to the annual increase in value at a tax rate of 23.8% (plus state income tax), the amount of the remission of blocking would be much less than the discount that would apply to the entire block.

Some may suggest that if this tax is imposed, billionaires will leave the country taking jobs with them. I think even if the wealthy who are subject to this tax chose to emigrate, the citizenship and location of the shareholders would have little or no impact on the employment of the people who work for these companies. Additionally, our current tax laws make it quite difficult for taxpayers to renounce their U.S. citizenship and leave the country without paying tax on their valued assets.

Wealth tax

Some people may oppose this tax as a “wealth tax” and claim that it is unconstitutional since the Sixteenth Amendment to the United States Constitution only allows an “income” tax to be levied. without distribution among states. This issue will surely be taken to the Supreme Court. I believe they will decide that this tax is authorized under the Sixteenth Amendment. A tax on the value of property is a wealth tax. A tax on to augment in the value of an asset is an income tax. The fact that this income is not taxed under the current tax law stems from the difficulties of the tax administration rather than from the correct definition of income. The taxation of increased wealth conforms to sound theories of income tax. Any increase in wealth can be viewed as income.

Final thoughts

The concept of imposing annual appreciation has been around for many years. This is his moment in the sun. If a Democratic senator chooses to vote against this proposal, it will not become law. If this proposal passes, many billionaires will need to start planning immediately to figure out how to handle this potentially very large cost. Warren Buffett has been widely quoted as saying it is wrong that he pays a lower tax rate than his secretary. I wonder if he also thinks it is wrong to have paid personal income tax on virtually any of his $ 60 billion in net worth (which will not be subject to personal income tax. income or inheritance on his death since he leaves everything to charity).


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