Biden’s ‘billionaire minimum tax’ proposal is terrible

What about the Biden administration’s approach to tax-the-rich populism: It’s creative. But creativity does not necessarily translate into sound tax policy.

In his State of the Union address, President Joe Biden reintroduced a proposal for a “billionaires’ minimum tax.” Not to be confused with Lowest taxes worldwide (This is part of the international discussion Organization for Economic Cooperation and Development, OR OECD), the Corporate book minimum tax (enacted in the Inflation Reduction Act last year), d Individual Alternative Minimum Tax (which has been in law since 1969), or the old corporate alternative minimum tax (which was abolished in 2017), the billionaire minimum tax is relatively novel in design—but by no means new.

Currently, people pay taxes on gains in the value of assets, such as stock appreciation or growth in privately held businesses, when assets are sold. If an asset is held for less than one year, the gains face ordinary income tax rates. If held longer, the rate of return would decrease, topping out at 23.8 percent. Deferral of capital gains tax reduces the effective tax rate and in some cases, the capital gains tax liability can be completely avoided due to a provision. Excludes capital gains on death.

Biden’s proposal would tax unreal Gain—the increase in value of an asset, even before it is sold. Taxpayers with more than $100 million in assets must pay a minimum effective tax rate of 20 percent on an enhanced measure of income that adds unrealized capital gains to more traditional sources of income such as wages, business income and investment income. If the general tax paid falls below 20 percent as part of the enhanced definition of income, the taxpayer must pay additional tax to bring the rate up to 20 percent. Any additional tax paid as part of minimum tax will be treated as future prepayment capital tax Liability when profit is actually realized.

by Increase the effective tax rate on capital gainsThe proposal would reduce U.S. savings, discourage entrepreneurship, and reduce economic output.

The real risk to growth comes from raising taxes on risky investment returns: investing in startups and new technologies that can provide huge returns – socially in terms of innovation and productivity and for investors personally – will be discouraged by high taxes. Meanwhile, the tax burden will increase for domestic savers, but not for foreign savers, giving them A relative advantage. In response, domestic savings and incomes would decline, and foreigners would finance a greater share of US investment opportunities, enjoying a larger share of the income.

An annual tax on paper profits would be obviously complicated. The biggest administrative problem is the valuation of non-tradable assets such as privately held businesses and taxing liquid taxpayers with large profits on paper but little cash in hand to pay a minimal tax bill. The proposal attempts creative solutions, such as formulaic rules and longer payment periods, but each would introduce new complications, tax planning opportunities and the potential for conflict with the already overwhelmed Internal Revenue Service.

Even with creative rules, the billionaire minimum tax could result in cash refunds to high-net-worth individuals during times of high volatility. It should be noted that when the proposal was made for the first time introduced In October 2021, the stock market was a All-time high: Barring a slight increase in December 2021, the S&P 500 has not reached that level. At the time, the potential consequences of taxing all these paper gains seemed enticing and tempting, but as the stock market dries up in 2022, it’s less appealing.

Given these problems, it’s not surprising that the idea hasn’t caught on around the world. As a prominent left-leaning advocate of taxation on unrealized gains a paper Last year, “No income tax system to date has been able to tax the full return on assets that includes unrealized capital gains.”

Almost every country taxes capital gains when they are realized. Moreover, the US policy of taxing long-term capital gains at lower rates than ordinary income prevails; Mrost country in OECD Tax capital gains at a lower rate than the rate at which they tax ordinary income, as well as at a reduced rate compared to US capital gains rates.

Ultimately, the billionaire minimum tax is another manifestation of the disconnect between spending aspirations and tax philosophy.