Democrats’ proposal for a tax on billionaires is already spurring questions about how the sweeping new levy would be implemented and how America’s wealthiest—and their sophisticated advisers—can get around it.
The plan attempts to zero in on a narrow slice of the super-rich—those with at least $1 billion in assets or incomes of $100 million for three consecutive years. Anyone in that category would be forced to pay an annual tax on any unrealized gains on publicly traded assets like stocks. For private assets, which are far more difficult to value, the Internal Revenue Service would take a more hands-off approach, requiring billionaires pay an extra tax when the holdings are sold.
Advocates of the tax, including its sponsor, Senate Finance Committee Chairman Ron Wyden, say it’s a way to raise revenue while leveling the playing field between the middle class, which pays taxes every year on their salaries, and the very wealthy, who can use a variety of strategies to defer tax bills, sometimes indefinitely. Critics of the levy argue it would too difficult to implement, may be held unconstitutional by the Supreme Court and, according to billionaire hedge fund manager Leon Cooperman, represents a deplorable example of “attacking wealthy people.”
Democrats’ biggest challenge in designing such a tax may be devising ways to make sure that the richest Americans actually end up paying it. The legislation—which was unveiled Wednesday but has been under consideration by Wyden and his team for a couple of years—includes provisions aimed at blocking strategies, such as trusts and insurance products, that advisers to the top 0.0001% were already thinking about deploying.
Still, billionaires can afford the most sophisticated tax advice—accountants and lawyers who can both challenge the law in court and develop ingenuous new ideas for avoiding it. “The lawyers and accountants are going to be winners in this,” said Warren Racusin, a partner at Lowenstein Sandler in New York.
U.S. billionaires have doubled their collective net worth in the last five years to more than $5 trillion, according to the Bloomberg Billionaires Index, including a $1.2 trillion increase in the last 12 months. Because the wealthy only rarely need to sell their holdings, the vast majority of that new wealth came from unrealized gains. Billionaires who needed money can usually borrow against their fortunes and avoid a tax bill.
The super-wealthy would have a strong incentive to do everything they can to avoid the levy: In the first year that taxpayers qualify—2022 for current billionaires—they would owe taxes on all the gains their publicly traded assets had generated up until that point. They’d have five years to pay that bill, likely to be assessed at the top capital gains rate of 23.8%. Then, going forward, they would need to pay taxes annually on their gains on public assets. For any losses, they would get a deduction, which they could carry forward to future years or carry back as many as three years.
Cryptocurrency and other digital assets may end up needing to pay this annual tax. While the plan doesn’t specifically address them, it includes a broad definition of public assets, including those that are “readily tradable” on markets or “available on an online or electronic platform” that matches buyers and sellers.
Private assets, including art, property and non-public businesses that are hard to value, wouldn’t get the same treatment as stocks, bonds and other publicly traded assets. However, to keep billionaires from taking all their holdings private to avoid the tax, the proposal levies an extra charge on private assets when they’re sold. This “deferral recapture amount,” akin to an interest charge, tries to equalize the treatment of public and private assets.
If a billionaire’s tax becomes law, a first task of many advisers will be thinking of ways to make sure their wealthy clients don’t have to deal with it at all. Multibillionaires may have no choice, especially if they hold publicly traded assets with obvious values, but families with $1 billion or so may be able to get under the tax’s threshold.