Breaking Down Biden’s “Billionaire Tax”

In February’s State of the Union Address, the economy took center stage with the arrival of President Biden’s federal budget proposal. At a time of soaring deficit, what was the President’s plan to lower the federal deficit? Raise taxes on the uber-wealthy.

Calling attention to the 15% corporate minimum tax and expanded IRS budget, which passed as part of the 2022 Inflation Reduction Act, Biden’s budget message highlights measures his administration has taken toward fostering a more equitable economy. It also introduces several new tax hikes to shrink the deficit without cutting programs like Social Security and Medicare. Importantly, the President emphasizes that none of his proposed tax increases would impact families making less than $400,000 per year.

With House Republicans already voicing vehement opposition to the plan, the President’s budget stands little chance of passing through a divided Congress. Instead, it consolidates and clarifies the Biden administration’s economic plan in advance of his 2024 reelection campaign. The proposal signals the Biden Administration’s confidence in economic equity and fiscal responsibility as rallying points which can engender broad-based support.

Of his policy proposals, which include boosting capital gains tax rates and quadrupling taxes on corporate stock buybacks, his flagship Billionaire Minimum Income tax has garnered the most national attention. Despite its catchy tagline, the “billionaire minimum” would apply to households worth above $100 million, i.e., the richest 0.01% of Americans. The proposal would require these households to pay a minimum of 25% of their income annually, measured broadly as a net change in wealth. Rather than increasing the highest income tax bracket for top earners, the tax would extend to a component of income as yet untouched by federal taxes: unrealized capital gains. Simply put, the richest 0.01% would be subject to taxes on the appreciation of their capital assets—such as stocks, bonds, homes, and even jewelry—even before selling them for an explicit profit. The White House predicts that the tax will decrease the federal deficit by $360 billion in the next decade.

Biden’s rationale is simple: income taxes as currently implemented barely scratch the surface of billionaires’ wealth. Although upper-bracket single filers do currently pay a 37% annual income tax rate on reported earnings above $539,900, for the very wealthy this is only a small fraction of their true income. For those who have accumulated massive fortunes, their wealth gains in the form of property appreciation and investment growth dwarf their income that is taxable by the IRS. Berkshire Hathaway’s Warren Buffet, for example, paid only $23.7 million in income taxes between 2014 and 2018 despite a $24.3 billion increase in total wealth (which is a 0.1% tax rate for those keeping score at home). So, while income tax rates for the wealthy are substantial, the discrepancy arises when capital gains constitute the bulk of their wealth accumulation.

Research by the White House Council of Economic Advisors (CEA) confirms that this phenomenon is similarly pronounced when the upper 0.01% is considered as a whole. Using a more comprehensive measure of income derived from Forbes Magazine wealth estimates, a 2021 CEA study found that the 400 wealthiest Americans paid an average of just 8% in annual income taxes from 2008 to 2022.

Biden’s proposal demands a shift in the way we think about income. If an overwhelming majority of Americans, the President asked in his State of the Union Address, pay taxes annually on the entirety of their change in wealth, why should those with the largest fortunes have access to tactics that delay and ultimately reduce their tax obligations? The 20% minimum tax aims to force the tax returns of America’s richest to resemble those of everyday Americans.

As can be expected with tax policy esoterica, there is more to the story than meets the eye. By taxing capital gains as they accrue, the billionaire minimum tax would effectively terminate a provision called “stepped-up basis,” whereby the inheritors of an estate are no longer liable for appreciation that occurred during the decedent’s lifetime. When an asset is sold, capital gains tax applies to the difference between its sale price and its original purchase price, the latter of which is known as its “basis.” Current statutory tax code specifies that the basis of most asset portfolios “steps up” to its fair market value following its owner’s death and its subsequent inheritance. If an heir were to immediately liquidate their entire portfolio upon its receipt, for example, they would owe $0 in capital gains tax, irrespective of any prior capital gains that occurred. A stepped-up basis can therefore allow the families of the ultra-rich to completely sidestep capital gains taxes.

While the Biden Administration’s plan would put an end to stepped-up basis, this provision exists both to simplify and amplify the estate tax, a substantial federal tax on the transfer of property after death. Heirs of applicable estates—those worth in excess of $12.1 million in 2022—are required to pay rates of up to 40% on the estate’s fair market value. A stepped-up basis ensures that the estate tax applies to the full value of a decedent’s assets as opposed to their purchase price, which most often implies a substantially larger net tax. It also eliminates difficulties associated with estimating the prior value of assets which may have been purchased decades in the past.

Critics of the billionaire minimum tax argue the plan amounts to a double taxation of large estates, since owners would pay taxes first on any unrealized capital gains and then again via the estate tax on the transfer of their property to their heirs. Indeed, Biden’s political messaging obfuscates the reality that billionaires are already subject to this 40% figure—the CEA report that the Forbes 400 has paid only 8% annually in income taxes since 2010 does not account for the fact that most of its members have not yet bequeathed their estates to heirs.

The billionaire minimum tax is hardly the first proposal for a levy that extends beyond a traditional notion of income—Senators Elizabeth Warren (D-MA) and Bernie Sanders (D-VT) have voiced similar designs. However, it is a first for a plan of this nature to appear explicitly on the President’s agenda. In an economic environment of cascading inequality, the notion of justice in taxation is rightly moving in a direction in which wealth is considered holistically. Although the billionaire minimum tax is politically untenable for the time being, it appears to be gaining traction as the fulcrum of Biden’s tax policy agenda.