Proposal is among provisions Democrats are pursuing to pay for proposed $3.5 trillion spending plan
By Ken Thomas and Richard Rubin, September 24, 2021, Wall Street Journal
WASHINGTON—President Biden expressed support for a proposal under consideration in the Senate to place an annual income tax on billionaires’ unrealized capital gains.
The potential tax increase, being pursued by Senate Finance Chairman Ron Wyden (D., Ore.), would be among a number of tax provisions that Mr. Biden is seeking to pay for a proposed $3.5 trillion spending plan that encapsulates much of his first-term agenda. It is an alternative to some administration tax ideas that have flopped in Congress, and it would generate money from the wealthiest sliver of Americans, whose incomes can be a fraction of their wealth.
Republicans oppose both the spending and tax proposals in the package, and Democrats will need to remain united to get the bill through the narrowly divided Congress.
Asked about Mr. Wyden’s proposal, the president told reporters Friday at the White House that he supported the idea. Advancing it would require unanimity from Senate Democrats and almost all House Democrats, and it isn’t certain yet whether there is enough congressional backing.
“Look, I support a lot of these proposals. We don’t need all of the proposals I support to pay for this,” Mr. Biden said of the plan, adding that he was pursuing a tax agenda that would require Americans to pay their “fair share.”
Under current law, people pay capital-gains taxes only if they sell an asset. At death, those unrealized gains aren’t subject to income taxes and heirs only have to pay capital-gains taxes when they sell and only on gains since the prior owner’s death.
That rule, known as the tax-free step-up in basis, gives wealthy people an incentive to hold on to their assets and borrow against them to finance their lifestyles. Estate taxes can still apply.
Democrats view the current rules as an unjustified giveaway to wealthy people who can build fortunes without paying income taxes. Mr. Biden proposed treating death as a taxable event for income-tax purposes, with a $1 million per-person exemption and special rules for family-owned farms and businesses.
But congressional Democrats from farm states have effectively killed that idea, shooting down even larger exemptions and carve-outs for farmers.
That prompted Mr. Wyden to offer his alternative, which Mr. Biden backed on Friday.
The idea is that for billionaires only, annual gains in wealth would be treated as income. So under current law, someone whose net worth rose to $22 billion from $20 billion and sold nothing would have no income. Under Mr. Wyden’s proposal, that person would have $2 billion of taxable income.
One challenge for the proposal is that it would need to deal with losses, and the prospect of the government sending large checks to billionaires is politically unappealing. Lawmakers could allow deductions for annual losses while also imposing limits on those deductions or allowing them to carry forward to offset gains in future years.
Mr. Wyden has been working on the idea of annual taxes on unrealized gains for several years, and its adoption would mark a significant change to U.S. tax law that would redefine taxable income for a few hundred people. It would affect billionaires such as Jeff Bezos and Warren Buffett.
There is no official revenue estimate yet, but a similar proposal targeted at a larger group—the top 0.1% of households—would raise about $750 billion over a decade, according to a 2019 estimate from tax professors Lily Batchelder and David Kamin, who are now both senior Biden administration officials.
Mr. Biden emphasized that Democrats don’t need every tax-raising idea under discussion to cover the costs of their proposals.
“There clearly is enough from a panoply of options to pay for whatever it is that folks decide to pay for,” he said.
The proposal would be very difficult for the Internal Revenue Service to implement and enforce, partly because of the challenge of valuing illiquid assets, said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation. The resulting revenue stream could be volatile, and the proposal could make it harder for founders of large companies to maintain control.
“This in many ways is uncharted territory and to the extent that we’ve charted it, it’s pretty bumpy,” said Mr. Moylan, who opposes tax increases.
The system doesn’t need to be perfect in addressing every complexity, and policy makers should focus on making it easy to administer and hard to avoid, said Ari Glogower, a tax law professor at Ohio State University.
“You want to design a system that’s going to raise revenue and avoid the most substantial gaming opportunities,” he said.
Such a tax could also be potentially vulnerable to legal challenges as going beyond Congress’s power to tax incomes.
The House Ways and Means Committee approved about $2 trillion in tax increases earlier this month, focusing on corporations and high-income individuals. They have also backed an expansion at the Internal Revenue Service that would raise money too.
Senate Democrats have their own set of ideas beyond those, including changes to partnership tax law and an excise tax on corporate stock buybacks.
Mr. Biden said his meetings with progressive and moderate Democrats this week were collegial. He declined to provide a specific top-line number for the $3.5 trillion budget reconciliation package that he would support. He said he asked lawmakers to focus on policies in the broader healthcare, education and climate-change package that they view as important.
“One of the things that I think is important and I’m trying to get people to focus on is: What is it you like? Forget a number,” he said. “What do you think we should be doing?”
The president said it would take time to get his policy priorities approved.
“It’s going to take me a year to deliver everything I’m looking at here,” he said.
Mr. Biden also reiterated his stance that the legislation should be entirely paid for. “It’s going to be zero,” he said of the bill’s price tag.