The “Billionaire Tax”: What It Is and Why We Need It

Marc Stier |

UPDATE: Senator Ron Wyden has released his “Billionaires Income Tax” legislation—read the language of the bill here:

As negotiations between President Biden and House and Senate members over the Build Back Better plan have developed in the last few weeks, a new tax proposal to fund the close to $2 billion investment in health care, child care, paid family leave, climate change, and other programs, has come to the fore: a “billionaire tax.” While Senator Wyden and others have been discussing this proposal for some time, it is a relatively unknown concept and would be a new form of federal taxation. Here we briefly explain what it is and why it is an excellent idea.

The new proposal is to tax the increased wealth of the richest Americans each year. The tax would apply immediately to tradeable assets—stocks, bonds, mutual funds, and derivatives—where the value of the asset is known at the beginning and end of the year and the owner gets a financial statement that is reported to the IRS. The tax on non-tradeable assets, such as ownership in a business or real estate holdings, would be deferred until the asset is sold. Interest would be charged for those years that taxes were not paid but the asset increased in value.

The billionaire tax would apply to people with a minimum of $1 billion in assets or people earning more than $100 million in income three years in a row. Only about 750 households in the entire country have $1 billion in wealth and their total wealth increased by over $2 trillion just during the pandemic.

The rate for the new tax is still under negotiation. It is likely to be at least as high as the top tax on capital gains, the tax on income generated by the sale of assets, which is currently 20%, with an additional 3.8% net investment income tax. It appears that the goal of the billionaire tax is to raise about $25 billion a year or $250 billion over ten years.

The billionaire tax is necessary as part of the funding for the Build Back Better plan, which will cost roughly $1.75 to $2 billion. The original plan was to raise this money by increasing tax rates on American families making $400,000 or more and on the corporations that received a substantial tax break from the Trump tax cuts. Senator Sinema’s rejection of these proposals made it necessary to find an alternative source of revenue that does not raise taxes on anyone but the very rich owners of major corporations.

We believe that a billionaire tax is an excellent alternative and a good idea in its own right because it is necessary to correct a glaring loophole in our tax system that mainly benefits the very richest Americans.

The vast majority of income earned by most of us consists of wages, independent contractor payments, and small business profits. This is the income we rely on to pay for our daily expenses such as food, housing, transportation, and entertainment. However, the very richest Americans often have very little income of that kind. Billionaire Jeff Bezos, Amazon’s founder and largest stockholder, does not receive a salary. Instead, he and the other richest Americans rely on increases in their wealth—that is the growing value of their assets, such as stocks and bonds, mutual funds, and derivatives—to pay for daily expenses that far exceed those of average Americans. And while they sometimes sell those assets in order to pay for their living expenses—and pay a capital gains tax that is already at a rate lower than the income tax rate paid by most Americans—they don’t really have to sell assets. Instead, they borrow on the value of their assets to cover their daily living expenses. And, as a result, they can support an extravagant lifestyle while paying no income taxes at all. And then, when they die, the “capital gains step-up” provision of the tax code enables their children to avoid paying any taxes on the increased value of their assets.

The growing wealth of the richest Americans has made this tax loophole more and more attractive to them. And their wealth has increased dramatically even while most Americans have been suffering from the economic impact of COVID-19. According to Forbes data analyzed by Americans for Tax Fairness, America’s nearly 750 billionaires saw their wealth increase by a total of $2.1 trillion, or 70%, during the first 19 months of the pandemic.

Based on IRS data, ProPublica found that Jeff Bezos paid zero federal income taxes in 2007 and 2011. Elon Musk paid zero in 2018, and Michael Bloomberg paid zero times in several “recent years.” ProPublica also found that the richest 25 billionaires paid an effective tax rate of just 3.4% on a $400 billion increase in their collective fortune between 2014 and 2018. That rate is based on how much billionaires paid in federal income taxes during that period compared with how much their wealth grew. White House economists found that, on average, when the increased value of their stock was counted the wealthiest 400 families in the U.S. paid an effective federal income tax rate of just over 8% in recent years. In comparison, the average effective tax rate on all Americans is just a bit below 15%. Billionaires usually pay lower tax rates than middle-class workers such as teachers, nurses, and firefighters.

The billionaire tax is similar to the wealth tax proposed by Senator Elizabeth Warren during the 2020 presidential campaign. But because it is a tax on income—the income earned by wealth, not labor—it does not raise possible federal constitutional objections like a wealth tax does.

Thus, our view is that the billionaire tax is not only important to funding the Build Back Better plan but is a good idea in itself. At a time of growing income and wealth inequality, and after decades of Republican tax cuts for the wealthy that have placed the burden of paying for all the essential services provided by government increasingly on the middle class, the billionaire tax would be a huge step forward in making the federal tax system fairer.