President Biden’s proposed billionaire tax died so quickly that I scarcely had time to formulate an opinion before West Virginia Senator Joe Manchin, the Democrats’ fiftieth vote, shot it down. Now that I’ve had time to think it over, the billionaire tax strikes me as a somewhat radical proposal that, as Mark Twain famously said about Wagner’s music, is better than it sounds. But it’s also, paradoxically, a symptom of the Democrats’ extreme timidity on the general subject of taxation.
The billionaire tax was included in a package of proposed tax changes that the Biden administration introduced Monday. It would impose a 20 percent minimum tax on all income for people whose net wealth exceeds $100 million. (That “billionaire” bit is a slight exaggeration.) The radical part—the part that sounds dodgy to a lot of Washington policy wonks—is that “income” would include unrealized capital gains, which, strictly speaking, aren’t income at all.
What’s the timid part? That it’s not a real revenue proposal; it’s a campaign document for the midterms. We know it isn’t a real proposal because, even before Manchin chimed in, Biden knew he could never get 50 votes to support it, and, even if by some miracle he could, he’d face long odds sneaking it past the current Supreme Court.
Manchin came out against an earlier version of the billionaire tax proposed by Senator Ron Wyden all the way back in October. Back then, Manchin gave a dumb reason for opposing it. “I don’t like it,” Manchin said.
I don’t like the connotation that we’re targeting different people. There’s people that basically, that contribute to society, that create a lot of jobs, and invest a lot of money, and give a lot to philanthropic pursuits.
Manchin’s answer was dumb because our tax system already targets people at higher incomes with higher marginal tax rates. That’s what a progressive income tax is. Only Republicans think the U.S. income tax is too progressive; many Democrats (including me) believe that it needs to be much more progressive.
Manchin gave a much better reason Monday for opposing Biden’s billionaire tax. You can’t be taxed “on things you don’t have,” he said. “You might have it on paper. There are other ways for people to pay their fair share.”
Indeed there are.
You can lay on higher tax brackets for incomes well above $628,300, which is where the top marginal rate of 37 percent kicks in now for married couples filing jointly. Biden proposes raising that top rate to 39.6 percent, which is where it was under Barack Obama, but he doesn’t add any new brackets. There ought to be three or four piled on top, with the marginal tax rate maxing out at perhaps 70 percent, which was the top rate in the 1960s and 1970s. (Before that, the top rate was 90 percent or more.)
You can also tax capital gains the same as wage income, which Biden more or less proposes for people who earn in excess of $1 million. Biden would raise the top capital gains rate from the current 20 percent to 37 percent, which—combined with an existing net investment income tax of 3.8 percent—would lift the effective top tax rate on capital to 40.8 percent. Really, that’s the way it should be for all investors, not just those who earn more than $1 million.
You can also raise the top corporate tax rate above the pitiful 21 percent to which President Donald Trump lowered it from the previous 35 percent. Biden now proposes raising it to 28 percent. A decent case can be made that 28 percent would make the U.S. competitive with comparable industrial democracies—provided our tax code eliminated an accompanying thicket of deductions. That was the original idea, following the example of the 1986 income tax reform bill, when both parties discussed reforming corporate taxation a decade ago. But of course Trump lowered the top rate to 21 percent without eliminating any deductions, and in proposing an increase to 28 percent Biden isn’t eliminating any deductions either. Absent such housecleaning, the top corporate income tax rate should go back to 35 percent.
You can also tax unrealized capital gains at death, as Biden proposes. As things stand now, when you die and your assets transfer to your heirs, the only capital gains they must pay taxes on when they sell are those accumulated after they received the inheritance.
These reforms are all better ways than Biden’s billionaire tax to raise taxes on the rich. But it’s doubtful Manchin would support them. Indeed, except for the billionaire tax, every proposed Biden tax change cited above was also proposed by Biden last year, and Biden’s fellow Democrats—not just Manchin—shot them down. The Democrats rejected these tax changes, even though the changes didn’t go far enough.
Biden’s own timidity is reflected in his pledge not to raise taxes on anybody earning less than $400,000. The Democrats have been pampering the haute bourgeoisie in this fashion for more than a decade, with the protected class growing ever richer. President Barack Obama pledged not to raise taxes on anybody earning less than $250,000; now the magic number is $400,000. The notion that anybody today earning less than $400,000 (or even $250,000) can’t afford to pay higher taxes is patently absurd. Richard Reeves, a British-American senior fellow at Brookings, says mass denial by the affluent of their economic circumstances is the most baffling phenomenon he’s encountered in his adopted home. “If you’re upper middle class, and you’re comfortably making six figures as a household,” he told me, “then when we talk about the need to raise taxes on people who can afford it, we mean you.” But that’s a hard sell even to liberal Democrats.
So where do you end up if you’re a Democratic president? You end up, like Biden, proposing a tax on billionaires that you know will never become law.
The billionaire tax has been described as a wealth tax, but it isn’t that; a wealth tax is applied to what you have, not to how much what you have appreciated in value during the past year. The Biden administration describes it as an income tax, but it isn’t really that, either, because (as Manchin notes) unrealized capital gains don’t become income until you sell the asset.
The best case for taxing rich people’s unrealized capital gains is to think of it as a prepayment on capital gains tax that your heirs would pay if this country ever came to its senses and eliminated the “angel of death” loophole that allows capital gains to go untaxed at death. (I’m on record arguing that dead people control way too much of the U.S. economy; see “Defund the Dead,” December 24.) Dead or alive, you (or your estate) would end up paying about the same in taxes. Harvard economist Jason Furman argued Monday in The Wall Street Journal that the Biden proposal would make necessary allowances for illiquid assets to be taxed at a later date, and that in general the billionaire’s tax would broaden the tax base and be more progressive.
But even if by some miracle Manchin could be talked into supporting the billionaire tax, rich people would challenge it in court, and the IRS already has its hands full getting rich people to obey far less complex tax laws.
“It’s not like you report a certain amount of income and we all know what it is,” Georgetown economist Harry Holzer told me. There would, Holzer said, be endless “legal game playing.” The concept of taxing unrealized capital gains isn’t entirely novel; there’s some existing precedent in securities law, Samantha Jacoby, a senior tax legal analyst at the Center for Budget and Policy Priorities, advised me. But given the composition of the current Supreme Court, it would likely be hostile to the billionaire tax. “For all we know,” Steven Rosenthal, a senior fellow with the nonprofit Tax Policy Center, told me, “the Supreme Court would strike all those [earlier] laws too.”
Ultimately, the billionaire’s tax is both symptom and cause of the Democrats’ debilitating fear of increasing taxes on the superrich and the merely affluent. It was proposed because they just can’t bring themselves to do it. It’s being rejected for much the same reason. It will be helpful, perhaps in the midterms, because Democrats always think they want to raise taxes on the rich. But they hardly ever do it, and never by anywhere near enough.