The 16th Amendment to the U.S. Constitution gives Congress “power to lay and collect taxes on incomes.” Wealth is not income, so courts have found that straight-ahead wealth taxes are unconstitutional.
Biden’s plan gets around that large obstacle by taxing billionaires on the increase in their wealth. That gain, the administration argues, can be considered income: If your horse farm or your Renoir painting doubles in value, that increase can be thought of as income — just like wages from flipping burgers — even if you don’t realize the gain by selling.
Biden included the billionaire tax proposal on Monday as part of his budget plan for the fiscal year beginning in October. The proposal includes a minimum tax of at least 20 percent on the income of American households worth more than $100 million. The tax would apply only to the top 1 percent of the top 1 percent of households, with more than half of its proceeds coming from billionaires, the budget plan says.
Eric Zwick, an associate professor at the University of Chicago’s Booth School of Business, said the billionaire tax is a little bit like a conventional capital gains tax, except with the tax paid over time based on the best estimate of the value of the assets each year. That would make it like a withholding system, with taxpayers paying ahead of time for a tax that will eventually come due. As it is now, a lot of capital gains don’t get taxed because heirs don’t have to pay tax on the assets’ increase in value from when they were bought to when they were passed down.
There are lots of complications, though, including the difficulty of measuring the value of illiquid assets (like horse farms). Taxes on gains in illiquid assets would not be assessed annually — although that leads to other complications. Zwick said, “There are other ways to raise this that seem simpler,” such as increasing existing tax rates and closing loopholes.
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