President Biden is trying a clever trick with his so-called billionaire tax plan: raising taxes on the rich without taxing direct wealth.
The 16th Amendment to the U.S. Constitution gives Congress “the power to levy and collect taxes on income.” Wealth is not income, so courts have ruled that direct wealth taxes are unconstitutional.
Biden’s plan circumvents that major obstacle by taxing billionaires on the… increase in their wealth. That profit, the administration says, can be considered income: If your horse farm or your Renoir painting doubles in value, that increase can be seen as income — just like the wages of flipping burgers — even if you don’t include the profits. realized through sales.
Setting the tax in this way — as opposed to an explicit wealth tax like the one proposed by Massachusetts Democrat Senator Elizabeth Warren — increases the chances it will succeed in the Supreme Court (though Warren and her backers say her plan is constitutional, too).
“It’s about income,” Jason Furman, a Harvard economist who chaired President Barack Obama’s Council of Economic Advisers, told me Monday. “I see no reason why the court should say no.”
The twist, Furman said, is that wealth taxes rank significantly better with the American public than income taxes. By viewing the billionaire tax as a tax on income rather than wealth, the government may score points with the Supreme Court, but lose points with voters.
Biden was apparently encouraged by the positive reception of a similar tax plan proposed by Oregon Democrat Senator Ron Wyden. When Wyden introduced the latest version of its billionaire tax in October, he said, “It clearly aligns with some of the most challenging political communities in the country.”
Furman said Biden’s plan modifies Wyden’s to make it more likely to survive challenges in Congress and the courts. “This really reflects an attempt to say, if you had to legislate, which could actually be workable,” he said.
Biden included the billionaire tax proposal Monday as part of his budget plan for the fiscal year starting in October. The proposal includes a minimum tax of at least 20 percent on the income of U.S. households worth more than $100 million. The tax would only apply to the top 1 percent of the top 1 percent of households, with more than half of the earnings coming from billionaires, the budget plan says.
Daniel Shaviro, a tax expert at the New York University School of Law, wrote in an email Monday that while he believes the Biden tax is constitutional, “the current Supreme Court could very well drop it.”
Shaviro wrote that the Supreme Court could revive an “essentially defunct doctrine” from a case decided in 1920, Eisner v. Macomber, which ruled that income that is not actually realized (such as the gain in the value of an asset) should not be constitutionally taxed. That would be a shame, he wrote, because “the legal academy generally agrees that this doctrine from the Macomber case is both outdated (going back at least to Helvering v. Bruun, a 1940 case) and incorrect.”
Eric Zwick, an associate professor at the Booth School of Business at the University of Chicago, said the tax on billions is a bit like a conventional capital gains tax, except that the tax is paid over time based on the best estimate. of the value of the assets each year. That would make it like a withholding tax system, where taxpayers pay in advance for a tax that will eventually be due. As it stands, many capital gains are not taxed because heirs are not required to pay tax on the appreciation of the assets from the time they were purchased to the time they were passed on.
However, there are many complications, including the difficulty of measuring the value of illiquid assets (such as horse farms). Taxes on gains in illiquid assets would not be reviewed annually, although that leads to other complications. Zwick said, “There are other ways to increase this that seem simpler,” such as raising existing tax rates and closing loopholes.
number of the week
450,000
According to the median of economists’ forecasts collected by FactSet. That would be down from 678,000 in February. The Bureau of Labor Statistics will release the official number Friday.
Quote of the day
“Subsidizing banks to lend excessively and taking so much risk that the entire banking system is threatened is like subsidizing and encouraging companies to pollute when they have clean alternatives.”
— Anat Admati and Martin Hellwig, “The Bankers’ New Clothes: What’s Wrong With Banking and What You Can Do About It” (Updated Edition, 2014)
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