Liquidity issues would make President Joe Biden’s proposed “billionaire tax” difficult to execute, Tyler Goodspeed, former acting chairman and vice chairman of the Council of Economic Advisers, told Yahoo Finance Live in a recent interview.
“I think my main reaction is, it strikes me as a little bit gimmicky in an election year,” he said. “Look, if you think that billionaires should be paying more in taxes, then I think you should be seriously considering an elimination of the step up in basis at the time that the estate tax is levied.”
Biden’s 2023 proposed budget would impose a mandatory minimum tax rate of 20 percent of cumulative income, including unrealized investment income that currently is untaxed, for people worth more than $100 million.
“For too long, our tax code has rewarded wealth, not work, and contributed to growing income and wealth inequality in America,” The White House said in a press release. “Under current law, when an American worker earns a dollar of wages, that dollar is taxed as they earn it. But when a billionaire earns income because their investments increase in value, that gain is too often never taxed at all.”
Goodspeed, who currently serves as a Kleinheinz Fellow at Hoover Institution at Stanford University, noted that the bill’s provisions to increase taxes on unrealized returns may be difficult and possibly counterproductive.
“There are lots of issues when you start taxing unrealized capital gains,” he said. “How do you value some of those assets? A lot of those assets are not perfectly liquid. And how do you handle cash flow issues that some of these folks may have to liquidate some of those assets, some of those illiquid assets, in order to pay that tax liability even if it’s stretched out over several years.”
Under current federal tax code, most assets are only subject to taxes after they are sold and the gains are fully appreciated. Certain exemptions apply for the sale of a house which has been occupied by the owner for two or more years and other illiquid assets.
However, a large percentage of billionaires’ wealth is held in unrealized stocks and securities, which are generally not subject to federal income taxes. Back in 2019, for example, about 99% of billionaire Warren Buffett’s $85 billion net worth is tied to his conglomerate holding company, Berkshire Hathaway (BRK-A, BRK-B).
If dividends from capital gains are taxed, they are generally taxed at a preferred, lower rate than other income. This is part of the way that wealthy individuals can amass fortunes in the twelve-figure range while paying a comparatively small tax rate.
An analysis from OMB and CEA economists released last year estimated that the wealthiest 400 billionaire families in America paid an average of just 8.2 percent of their income in federal taxes.
“I think there are more efficient ways to go about making sure that the highest income tax, highest income households are paying their fair share,” Goodspeed opined.
Pundits view the budget as unlikely to pass an evenly split Senate, especially after Senator Joe Manchin came out in opposition to the bill.
“I think at the end of the day, the probability of this stuff passing is pretty close to zero,” Goodspeed said. “And that’s why I think it is, for the most part, election signaling, that this is a political document first and foremost.”
Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.