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Biden's "Billionaire Minimum Income Tax" would hit more than just billionaires

MoneyWatch: Biden unveils tax hike on wealthy
MoneyWatch: President Biden unveils $5.8 trillion budget proposal for 2023 which includes wealth tax 04:22

President Biden said Monday he wants to introduce a new tax levied on the wealthiest families in U.S. The idea is to make sure the richest Americans "pay their fair share," he said — an issue that's taken on added urgency in recent years given the wealth gap in the U.S. is roughly as wide as it was a century ago during the Gilded Age.

Under the proposal, the new tax — dubbed the "Billionaire Minimum Income Tax" — would apply to the almost 30,000 families in the U.S. with assets of more than $100 million. In other words, the tax isn't solely targeting billionaires, of which there are about 700 in the U.S. 

These households would be subject to a new minimum tax of 20%,  ensuring they don't pay lower tax rates than many lower- and middle-income Americans. 

Although the U.S. tax system is designed to be progressive, with the wealthiest citizens paying a greater share of their incomes than everyone else, some economic research has found that the country's 400 richest families pay a lower tax rate than the middle class. That's due to four decades of tax cuts for the rich, as well as preferential treatment for capital gains, such as the profits made from sales of stocks and bonds, which are taxed at a lower rate than income.

The new tax would work by targeting "unrealized gains," or potential profits that exist on paper because the underlying asset has yet to be sold. Under the current tax code, gains are only taxed if they are realized, such as when you sell a stock and record a profit.

Analysis of Biden's budget proposal for 2023 fiscal year 08:16

"The polling is good for any tax that can be labeled a 'Billionaire Tax' — people think, 'That's somebody else, and they ought to contribute more'," said Steve Rosenthal, senior fellow at the Tax Policy Center. "And 'hundred-millionaires' probably aren't too sympathetic as a class, either."

The proposal suggests that the tax code should include unrealized gains when considering average tax rates, said Garrett Watson, senior policy analyst at the Tax Foundation. "And that there should be a minimum floor when you look at unrealized gains — and the minimum is 20%."

Here's what we know so far about the tax and how it would work:

Who would pay the Billionaire Minimum Income Tax?

While the proposal is labeled as a tax on billionaires, most of the families who would be impacted are in fact multimillionaires.

"The most important thing about the Billionaire Minimum Income Tax is that it's really not on billionaires, it's not a minimum tax and it's not on income," Rosenthal noted wryly.

There are almost 30,000 families in the U.S. with assets of more than $100 million, according to the Credit Suisse Global Wealth Databook 2021. The tax would also hit the nation's roughly 700 billionaires, such as Jeff Bezos, Warren Buffett, Bill Gates and Elon Musk. 

Each year about 160 million families file taxes with the IRS, which means this tax would impact about 0.01% of all Americans. 

How much money would be raised by the tax?

The Biden administration is projecting that the tax would raise $361 billion over 10 years. 

Mr. Biden's budget blueprint projects new revenue from sources such as the wealth tax would lead to lower federal deficits, more money for police, and greater funding for education, public health and housing.

Hasn't this been proposed before? 

If it sounds familiar, that's because Democratic lawmakers have issued similar proposals in recent years. 

Last fall, for example, Senate Finance Committee Chairman Ron Wyden of Oregon unveiled his billionaires income tax. Under his plan, tradable asset such as stocks would be valued annually. Billionaires would be taxed on their gains during that period — whether they have sold the asset or not. 

Those ideas were floated in order to pay for Mr. Biden's domestic spending plans, such as the Build Back Better Act. But those spending plans were put on hold after compromise talks with Democratic West Virginia Sen. Joe Manchin collapsed.

How would the Billionaire Minimum Income Tax actually work?

Basically, families worth at least $100 million would be assessed on whether they are paying a tax rate of at least 20% on their full income, which the Biden administration says would include unrealized appreciation of assets. 

Rosenthal noted that the plan isn't really a tax in the conventional sense, in which a portion of your annual income goes the IRS. According to the Treasury Department, payments would be treated as a prepayment that would be credited against taxes paid at a later date on unrealized capital gains; in other words, those wealthy families wouldn't be taxed twice because the tax would act like a cash advance to the IRS against future capital gains taxes triggered when they sell stock or other assets. 

That's an important point, Rosenthal noted, because it addresses what he calls "one of the great loopholes" in the tax system: Unrealized gains aren't taxed when heirs inherit assets, enabling them to benefit from what's known as the "step-up in basis" provision. With that, the baseline price of an asset is reset to its value upon inheritance, which is often higher. 

Think of a woman who buys stock at Apple at $1 a share and holds it until she dies. When her heirs inherit the stock, the new basis is Apple's current trading price — currently about $175 per share. If they sell the stock immediately, the heirs pay tax on any profit they earn above the $175 per share price, not the $1 price paid by woman who bought the stock years earlier. 

"Unrealized gains held at death aren't taxed when they are passed onto beneficiaries — they take their tax basis at fair-market value," Rosenthal said. "Entrepreneurs like Bezos and Musk have been able to amass great fortunes in the stocks of companies they founded and developed."

He added, "If they hold that until death, all that unrealized appreciation disappears. And that's not right."

What obstacles does the proposed tax face?

There are plenty of questions about whether the tax could be enacted, experts say. For one, it's unlikely to get support from Republican lawmakers, and it's unclear whether moderate Democrats would get behind the idea, they noted. 

Second, any bill would likely be challenged in court over its constitutionality.

"It's a rather uncharted area," Rosenthal said. 

With reporting by the Associated Press.

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