Fallout From Billionaires Tax Could Touch Lower Quintiles

The controversial tax may be dead but could still have far-reaching consequences, says our columnist.

By Jerilyn Klein

The proposed Billionaires Income Tax recently introduced by Senate Democrats to help offset the cost of President Biden’s $3.5 trillion spending plan appears to be going nowhere. But although this proposal was omitted from the White House’s subsequently released plan, it’s generating a lot of buzz about what it could still potentially mean for affluent Americans.

Some say a more likely scenario is the proposal will open the door for taxing unrealized capital gains (the increased value of unsold assets) for affluent people with lower net worth. Think of the billionaire ducking the punch while the less wealthy taxpayer standing behind takes the hit.

According to the proposal issued by Sen. Ron Wyden (D-Ore.), chair of the Senate Finance Committee, the Billionaires Income Tax would apply to approximately 700 taxpayers and raise “hundreds of billions of dollars.” The tax would target the unrealized gains of taxpayers with more than $100 million in annual income, or more than $1 billion in assets for three consecutive years.

“This will absolutely be challenged,” says John Gehri, CFP, ChFC an advisor with Harvest Financial Advisors in Cincinnati, Ohio, and a Rethinking65 columnist who writes about tax issues.

Reading Between the Lines

The first issue, he says, is the language of the 16th amendment: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

But the IRS in Section 61(a)(1) of the Internal Revenue Code defines gross income as “income from whatever source derived, including (but not limited to) compensation for services, including fees, commissions, fringe benefits, and similar items.” Tax experts say unrealized capital gains are not income.

“The second issue is that the people this is intended to impact are the very ones who can afford to defend themselves,” says Gehri.  “Historically, implementing tax regulations on the lowest income quintile does not provide additional cash as they have little to take,” he says, “and attempting to increase the taxes of the highest .001% of income earners shows similar results.”

That’s because the wealthiest can afford to pay CPA firms and law firms that can provide sophisticated planning to minimize the costs, he explains.  “Where this leaves us is that most tax increases are paid for by the second- and third-income quintiles,” he says.

Added Complications

From a practical standpoint, it would also be very difficult to enforce the tax because it would require an annual valuation of all assets subject to the tax to mark them to market, says Gehri.

“This would be an enormous undertaking under the best of circumstances:  How would one determine a defensible valuation for a unique asset such as a painting or other unique work of art?  A wine collection?  A yacht?  A privately held business?”

And since the Billionaires Income Tax would apply to those who invest a significant portion of their assets in things other than publicly traded stocks and mutual funds, this would be rather complicated, says Gehri. [Sen. Mitt Romney (R-Utah) says the tax would actually increase the demand for farms and fine art.]

“Assuming that those challenges can be overcome, we arrive at the next issue: How would these taxes be paid?” asks Gehri. “If non-publicly traded assets are part of this calculation, selling these assets would simply create a merry-go-round where the highest earners are trading these assets among themselves as no one else could afford to buy them.”

If the billionaire tax proposal is passed, by declaring that unrealized gains are now classified as income under 61(a)(1), “this would almost certainly lead to increased taxes on the affluent in the future,” says Gehri.

However, “I believe it is highly unlikely that the proposal will be passed,” he says. “No bill has been introduced yet and even the concept has drawn criticism from the Chairman of the Ways and Means Committee, Richard Neal.”  He notes that Neal favors the tax increases outlined in the Build Back Better legislation his group introduced.

“No plans yet to discuss with clients today,” says Gehri. “I want to see more of the particulars first.”

Jerilyn Klein is editorial director of Rethinking65.



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