Tax the Rich: make taxable their unrealized capital gains

[jserraglio]

BLOOMBERG

Democrats Target ‘Buy, Borrow, Die’ With Their Billionaire Tax Plan

With their latest tax proposal, Democrats are going after an elusive target: U.S. billionaires, and their growing piles of untaxed investment gains.

More than $5 trillion is held by Americans worth at least $1 billion, according to the Bloomberg Billionaires Index. This exclusive group -- more than 800 U.S. billionaires are now tracked by the index -- has more than doubled its collective net worth in the last five years.

Yet as the wealth of America’s billionaires soared, their tax bill didn’t rise by the same extent. Under the rules, investment returns are only taxed when assets are sold, and the wealthy have the flexibility to only rarely sell, if ever.

For Democrats, that’s a problem that requires a creative -- some say outlandish -- solution. Specifically, a “billionaire’s tax,” which would be an unprecedented annual levy on the investment gains of America’s richest.

Some billionaires are outraged by the idea. “We should not be attacking wealthy people,” hedge fund manager Leon Cooperman said. “Are we a capitalist nation or are we a socialist nation?”

“Eventually, they run out of other people’s money and then they come for you,” Elon Musk, the world’s richest person, tweeted Monday evening. Musk’s fortune has grown by $119 billion since the start of the year.

An analysis last month by White House economists argued the wealthiest Americans are under-taxed when you take into account a broader definition of income that goes beyond the amounts reported to the Internal Revenue Service each year and includes unrealized gains. The Council of Economic Advisers economists estimated the 400 richest families paid a rate of 8.2% on $1.8 trillion in income from 2010 to 2018.

Advocates of the proposal, which is being championed by Senate Finance Chair Ron Wyden of Oregon, say it would combat inequality by hiking the effective rate on billionaires, ensuring that the gains of the very wealthy are taxed more like the salaries of middle-class Americans.

Under current rules, the ultrarich can entirely avoid income taxes by holding assets until they die. If they need money -- and many have far more than they could ever spend in a lifetime -- they can borrow against their assets, a tax-avoidance strategy known as “buy, borrow, and die.”

“Those three things get them out of paying taxes,” Wyden said earlier this month. “Nurses and firefighters pay taxes every year, and under my plan, billionaires will, too.”

The proposed tax wasn’t Democrats’ first choice, but it has gotten attention from policymakers in recent days after Senator Kyrsten Sinema, a moderate Democrat from Arizona, reportedly threw cold water on more traditional ideas to raise revenue, including an increase of the corporate tax rate.

In a CNN interview on Sunday, Treasury Secretary Janet Yellen took pains to distinguish a billionaire’s tax -- “a tax on unrealized capital gains of exceptionally wealthy individuals” -- from a wealth tax, an idea for an annual levy on the fortunes of the wealthy that, as a candidate, Biden opposed.

Cooperman, 78, called the proposal “stupid,” saying it turns the “tax structure upside-down,” and fans the flames of class warfare. He said he supports an end to tax loopholes like the one for carried interest, which allows some private equity managers and venture capitalists to pay lower rates on one of their main forms of compensation. Cooperman is worth $2.5 billion, according to the Bloomberg Billionaires Index, though he said that number is too low without elaborating.

Ultrarich Americans are currently under no obligation to disclose their net worth to anyone, including the IRS. That makes it difficult to gauge just how much a billionaire’s tax would raise.

House Speaker Nancy Pelosi told CNN on Sunday that the proposal was still being drafted and was expected to raise $200 billion to $250 billion in revenue over 10 years. Estimates based on the Bloomberg rich list suggest the tax could raise far more than that, particularly if the wealth of the top 0.001% continues to surge.

The Bloomberg index estimates that U.S. billionaires have increased their total net worth by around $1.2 trillion, or 29%, in the last 12 months alone. The vast majority of that is in the form of unrealized gains.

One person who stands to be hugely affected is Musk, who’s worth $288.6 billion, according to the index. Musk’s fortune is up 70% this year alone because of the soaring values of Tesla Inc., the publicly traded electric-car company he co-founded, and SpaceX, his private rocket business.

Taxing unrealized gains like Musk’s will require creating a new tax regime. Some worry the levy would create too many administrative and compliance issues, problems that have plagued previous efforts to tax wealth at the top.

“Many of the richest people in America own private businesses that are quite hard to value and seem likely to be excluded,” said Eric Zwick, a finance professor at the University of Chicago Booth School of Business. “The tax could end up exempting a lot of wealth held at the top, which is what we’ve seen with these taxes in Europe.”

To make the levy easier to administer, it would be narrowly focused on those with $1 billion in assets or three consecutive years of $100 million or more in income. Publicly traded assets -- which are easier to value on an annual basis -- would be treated differently from private assets.

Stocks and other publicly traded assets would be marked to market each year and trigger an annual tax based on their performance. If a billionaire’s assets lost value in a given year, they’d take a deduction on their taxes for those losses.

Gains on private assets -- including harder-to-value assets like real estate, art and private companies -- would escape the annual levy, and only be taxable when sold. However, to prevent billionaires from moving assets out of public markets to avoid the tax, these illiquid assets would incur interest on their deferred gains, an extra charge that would be paid when the owner eventually sells an asset.

For Musk, the new plan could mean a huge tax bill on his embedded gains in Tesla, which makes up the bulk of his fortune. For SpaceX, which he owns about half of, Musk would have more time to pay because it’s a private company. The rocket company was recently valued at more than $100 billion.

In years when markets slide, the proposal could mean people getting refunds. Dan Gilbert, who owns the NBA’s Cleveland Cavaliers and founded mortgage lender Rocket Cos., for example, could get a tax deduction this year if the plan was in place. Gilbert, worth about $30 billion, has seen his net worth drop $3.6 billion this year as Rocket shares have fallen 18%.

Despite potential difficulties, the tax could end up raising hundreds of billions, and perhaps trillions, of dollars in revenue over time. About two-thirds of American billionaire wealth is in the form of public companies, according to an analysis of Bloomberg data, and asset values have ballooned recently.

So far this year, the very largest U.S. fortunes -- the 169 Americans who are among the 500 richest people in the world -- have about $516 billion in unrealized gains on public and private assets, including options.

The total collected could be especially astronomical in the first year of the tax, when billionaires would be required to pay taxes on any built-in gain on their tradeable assets up until now. The current top rate on capital gains is 23.8%, suggesting the tax could bite off a large piece of fortunes fueled by wildly successful companies like Amazon.com Inc., Alphabet Inc. or Microsoft Corp.

More than half of the 25 richest Americans hold shares of public companies that they founded or acquired for very little compared with their present value. For these 13 billionaires, total unrealized gains add up to more than $1 trillion. The proposal would allow billionaires to pay this initial tax over five years rather than all at once.

Jeff Bezos, the second-richest person in the world with $192.6 billion, would also be hugely affected by the proposal. Nearly all of Bezos’s $170 billion Amazon stake would be taxable because it was worth practically nothing when he acquired it. The same is true for Mark Zuckerberg, whose fortune is almost entirely made up of his $119 billion in Facebook Inc. shares.

But many other billionaire fortunes aren’t so simple. Bill Gates, the fourth-richest person on the planet with more than $130 billion, has a complicated portfolio made up of private businesses, real estate and more than a dozen public companies. Larry Ellison, founder of software maker Oracle Corp. and the eighth-richest person, owns 98% of a Hawaiian island along with one-third of the housing stock, a grocery store, the gas station and the newspaper there.

[Rach3]

Seems unworkable to me in several respects, some of which problems are noted in the article.

Perhaps a dumb idea, but a better ,easier to administer plan might be an entity level minimum tax, say 20 %, on gross income above a certain $$ level of all C and S corporations,LLC's,partnerships, joint ventures, estates, trusts, "gross income" being all revenue before any expense deductions, gross income usually shown on very first line of most entity tax returns.Would not get directly at un realized cap gains of entity equity owners , but I believe would reduce the market value of their equity interests plus generate immediate, easily measurable tax revenue.

Any tax experts here could weigh in ?

[Belle]

As long as you're all doing the gettin' and not the payin' aye?

[Rach3]

As long as you're all doing the gettin' and not the payin' aye?

“Just the facts,Ma’am.” Most of those who post here have higher effective tax rates than those named in the Bloomberg article.

[jserraglio]

As long as you're all doing the gettin' and not the payin' aye?

Which is more characteristic of an arriviste, Milady: implying you know how little is ours, or bragging about how much belongs to you?

[maestrob]

Seems unworkable to me in several respects, some of which problems are noted in the article.

Perhaps a dumb idea, but a better ,easier to administer plan might be an entity level minimum tax, say 20 %, on gross income above a certain $$ level of all C and S corporations,LLC's,partnerships, joint ventures, estates, trusts, "gross income" being all revenue before any expense deductions, gross income usually shown on very first line of most entity tax returns.Would not get directly at un realized cap gains of entity equity owners , but I believe would reduce the market value of their equity interests plus generate immediate, easily measurable tax revenue.

Any tax experts here could weigh in ?

The tax on unrealized gains would only apply to liquid assets, like stocks & bonds, according to NYT this morning.

I'm not holding my breath on this one.

[maestrob]

How Democrats Would Tax Billionaires to Pay for Their Agenda

The plan stakes out new territory by putting levies on unrealized gains in the value of billionaires’ liquid assets, such as stocks, bonds and cash.

By Jonathan Weisman
Oct. 27, 2021, 5:00 a.m. ET

WASHINGTON — Senate Democrats plan to tax the richest of the rich, hoping to extract hundreds of billions of dollars from the mountains of wealth that billionaires sit on to help pay for their social safety net and climate change policies.

The billionaires tax would almost certainly face court challenges, but given the blockade on more conventional tax rate increases imposed by Senator Kyrsten Sinema of Arizona, Democrats have few other options for financing their domestic agenda.

It would for the first time tax billionaires on the unrealized gains in the value of their liquid assets, such as stocks, bonds and cash, which can grow for years as vast capital stores that can be borrowed off to live virtually income tax free.

The tax would be levied on anyone with more than $1 billion in assets or more than $100 million in income for three consecutive years — about 700 people in the United States. Initially, the legislation would impose the capital gains tax — 23.8 percent — on the gain in value of billionaires’ tradable assets, such as stocks, bonds and cash, based on the original price of those assets.

For men like the Facebook founder Mark Zuckerberg, the Amazon founder Jeff Bezos and the Tesla founder Elon Musk, that hit would be enormous, since the initial value of their horde of stocks was zero. They would have five years to pay that sum.

After that, those billionaires would face an annual capital gains tax on the increase in value of their tradable assets over the course of the year.

Democrats say the billionaires tax could be one of the most politically popular elements of their social safety net and climate change bill, which is expected to cost at least $1.5 trillion and could be completed as soon as Wednesday.

“I think there is an absolute understanding that at a time of massive income and wealth inequality, when you have people like Jeff Bezos, in a given year, not paying a nickel in federal income taxes, that these guys are going to have to start paying their fair share,” said Senator Bernie Sanders, the Vermont independent.

But implementation could be tricky. Billionaires have avoided taxation by paying themselves very low salaries while amassing fortunes in stocks and other assets. They then borrow off those assets to finance their lifestyles, rather than selling the assets and paying capital gains taxes.

Such tax avoidance could be adapted to the new system, for instance by shifting wealth from tradable assets like stocks to less liquid ones like real estate or companies. Such non-tradable assets would not be taxed yearly, but to discourage a flight of capital from stocks and bonds, Democrats’ tax proposal would impose a new interest charge on them, which would be paid when those assets were sold, on top of the existing capital gains tax.
.

The interest charge would be equal to the federal short-term interest rate plus one percentage point — currently, a total of 1.22 percent — and it would be levied on the gain in value of the asset accrued over a year.

The proposal would ease billionaires into the new system, with the initial five years to pay the first bill. They could also deem up to $1 billion of tradable stock in a single corporation to be a non-tradable asset, to ensure that founders of a company could maintain their controlling shares.

But the proposal also includes a number of provisions to ensure billionaires could not avoid paying the new taxes by squirreling away assets in pass-through companies such as partnerships, hiding them in trusts or giving them to family members.

For instance, any gift or bequest that did not go to a spouse or charity would be considered a taxable event, subject to capital gains taxation.

The plan faces resistance from some Democrats who worry that it may not be feasible and could be vulnerable to legal and constitutional challenges. The Constitution gives Congress broad powers to impose taxes, but says “direct taxes” — a term without clear definition — should be apportioned among the states so that each state’s residents pay a share equal to the share of the state’s population.

The 16th Amendment clarified that income taxes do not have to be apportioned, and proponents of the billionaires tax have been careful to portray it as a tax on income, not wealth.

https://www.nytimes.com/2021/10/27/us/p ... s-tax.html

[Rach3]

I'm not holding my breath on this one.

Nor I. After the first tax " hit" , it then also seems huge annual tax deductions would then also need to be allowed if the assets declined in value in a given year , even though the asset owner could still keep the assets hoping for a later rebound.

[maestrob]

I'm not holding my breath on this one.

Nor I. After the first tax " hit" , it then also seems huge annual tax deductions would then also need to be allowed if the assets declined in value in a given year , even though the asset owner could still keep the assets hoping for a later rebound.

Bingo!

I can hear the squealing already, as from Elon Musk:

“Eventually, they run out of other people’s money, and then they come for you,” Mr. Musk complained on Twitter.

https://twitter.com/elonmusk/status/1452792781726961668