Billionaires Beware: Congressional Toils and Trials
Updated: Jan 12
On Wednesday 27th October, Oregon Senator and chair of the Senate Finance Committee Ron Wyden unveiled his plans for a new tax that targets the ultra-wealthy. This controversial plan was proposed as an alternate way of funding President Biden’s goliath $1.75 trillion ‘Build Back Better’ package.
Dubbed the ‘Billionaire’s tax’, this plan would require individuals with an annual income of over $100 million, or those who hold over $1 billion in assets for three years, to pay a 23.8% capital gains tax on the appreciation of their publicly traded assets. If this were to be implemented, even though it would affect just 700 people, it is projected to raise between $200 billion and $250 billion before the spending plan finishes.
Although this is the current rate of capital gains tax for those with this level of wealth, the marked difference is that this measure would tax assets every year, regardless of whether or not they were recently sold. Under current US law, a gain can only be taxed if it is ‘realised’ by the owner when they sell an asset. It is this mass of unutilised potential, namely the tax from unrealised gains, that has created so much controversy.
Democrats suggest that the taxing of unrealised gains is a simple issue of fairness. For example, Amazon founder Jeff Bezos pays himself a salary of $81,840 a year – a minute fraction of his $193 billion net worth – whilst still owning and accruing on the majority of his wealth that is tied up in Amazon stock, which, therefore, goes untaxed. This is a common loophole used by billionaires in the US to minimise their tax and is the reason the 25 richest Americans pay, on average, 15.8% less than the typical US worker. This damning statistic has pushed President Biden to increase tax on the richest Americans as part of his mission to reduce inequality and improve infrastructure. There is, however, heavy debate over whether Wyden’s plan is the best way to implement this goal and, if it is, whether it’s even possible.
Perhaps the biggest hurdle the Democrats must overcome to pass this bill is that of legality. Many have suggested that taxing such a small subset of people in this way is unconstitutional. It has been highlighted that it may violate Article 1 Section 9 of the constitution, which states income taxation is prohibited unless ‘in proportion to the census’. With this, the Supreme Court is likely to face a stream of cases in which they would need to decide whether taxing a group of just 700 is constitutionally acceptable, and then whether unrealised gains can be classified as income tax. If the Supreme Court was to rule on either of these issues then the bill would need to be heavily altered, if not abandoned in its entirety.
Although Wyden argues the plan is indeed constitutional as it calls for “annually taxing income from capital gains” (part of the tax code), for the bill to succeed, it would need votes from every Democratic Senator and almost every Democrat in the House. So far, this seems unlikely. Joe Manchin, West Virginia Senator, has been one of the most vocal critics of the bill, suggesting that it unfairly targets people that “have contributed a lot to society” and “create lots of jobs and invest a lot of money”. Whilst Democrats on the Finance Committee expressed surprise at Manchin’s position, it is likely he is not alone, and the Democrats may struggle to pass this bill relying solely on partisan support.
Perhaps less surprisingly, Republicans, and the billionaires the tax will affect, have also expressed their doubts. Elon Musk, who could owe as much as $50 billion under the new proposal, recently took a dig at the proposal on Twitter. In response to a user who suggested that, if the bill passed, it could open up the potential for tax hikes targeted at middle-class Americans, he agreed, stating: “Exactly. Eventually, they run out of other people’s money and then they come for you”. Senate Minority Leader Mitch McConnell was also quick to oppose the idea. He described the tax as a “hairbrained scheme” designed to target those “who have invested wisely” and “compensate those who have invested poorly”. Although some may agree, Musk and McConnell fail to acknowledge the reason such a bill has been proposed; billionaires, even if they have invested wisely, are not paying their fair share of tax, whereas middle-class Americans are.
If the proposal can be pushed through in the face of such opposition and legal hurdles, the impacts will be far reaching. With a projected revenue of $250 billion over 10 years, most of this money will likely go towards economic recovery in the post COVID-19 world and investing in Biden’s ‘Build Back Better’ plan. In this way, it seems the bill would be an effective form of relief for everyday Americans whose livelihoods and wellbeing were hit particularly during the pandemic. It would also be a significant step forward in ensuring America’s billionaires, who saw their net worth increase by $1trillion during the pandemic, finally pay their share.
There is, however, notable scepticism over whether this tax could be genuinely effective, or whether billionaires would find further loopholes to taxation, greatly damaging the US economy as a consequence. Mitt Romney, Senator of Oregon, suggested that the bill had the potential to push innovation overseas and cause billionaires to pull their money from the stock market. Instead, they would then invest money into property or art rather than continuing to invest in projects that would create jobs and build the economy. In this way, the bill could have the opposite effect of its intended purpose, ensuring billionaires continue to be just as well off whilst jeopardising the stability and security of everyday Americans.
Critically, however, all potential consequences, good or bad, are simply hypothetical unless the Democrats are able to push the bill over the line before the end of the session.