What You Need to Know
- Hardest hit are those who make lots of money but have few legal options for sheltering it, like business owners.
- Sen. Van Hollen, wants to add language to the final bill that would do more to tax intergenerational wealth.
- The framework still contains a few provisions that could squeeze some member of the top 0.1%.
If you’re wondering how President Joe Biden’s tax framework would affect rich Americans, here’s a rough scorecard.
Winning: The vast majority of the top 1%, who might even get a tax cut.
Losing: The rich-but-not-fabulously rich, still working to build their fortunes.
Breathing a sigh of relief: America’s billionaires, who, despite threats to the contrary, likely get to keep the tools and tricks many use to avoid taxes altogether.
Biden’s plan was to raise tax rates on pretty much the entire 1%, the 1.6 million taxpayers earning at least $500,000 annually. After pushback from moderate Democrats, he’s settled for a far thinner slice of the upper crust, targeting the roughly 22,000 Americans earning $10 million or more with a new surtax.
Many Democrats including Biden also wanted to narrow America’s widening wealth gap by plugging loopholes and finding new ways to tax large fortunes. Those proposals ended up on the chopping block, though progressive Democrats are pushing to slip some back into the $1.75 trillion reconciliation bill before it becomes law.
Taxing the super-rich is difficult for the simple reason that huge fortunes don’t necessarily mean huge incomes. Investment gains are only taxed when they’re sold, and the very wealthy only rarely need to sell.
So, while the millionaire surtax would hike rates on high-earners — bringing the top marginal rate including Medicare taxes to almost 49% — it’s unlikely to have a significant impact on inequality at the very top, where U.S. billionaires tracked by the Bloomberg Billionaires Index now hold more than $5 trillion.
“This proposal is not going to impact those taxpayers the way that proponents wanted,” Kyle Pomerleau, a senior fellow at the right-leaning American Enterprise Institute, said of ultra-high-net-worth households. “Taxpayers will still be able to defer gains and not face tax on them.”
The 10 richest Americans, collectively worth more than $1.4 trillion, sold just $11.7 billion in publicly traded stock last year, according to data compiled by Bloomberg. The bulk of that came from $10 billion in Amazon.com Inc. shares sold by its founder, Jeff Bezos, whose philanthropy that year likely reduced his tax bill with charitable deductions.
Even if billionaires need money, they can get cash tax-free by borrowing against their assets. Elon Musk, the world’s richest person, with $302 billion, hasn’t sold any Tesla Inc. stock in years, but a December 2020 regulatory filing shows he’s borrowed $515 million from various investment banks.
Senate Finance Committee Chairman Ron Wyden’s billionaires’ tax, unveiled on Wednesday but left out of the bill on Thursday, would have forced the super-wealthy to report more income to the Internal Revenue Service by recognizing gains on publicly traded assets.
Wyden said he’s not satisfied with Biden’s framework, saying it focuses too much on income and not enough on accumulated wealth.
“The billionaires who made so much money during the pandemic seem to be able to not pay income taxes for years and years,” Wyden told reporters Thursday. “I’ll be working with the administration so you don’t end up with a situation where, for example, on a pro basketball team the pro athletes have their taxes go up and the billionaire owners are still in a position where they can avoid taxes.”
Musk, whose net worth has soared by $132 billion this year, criticized the idea of a billionaires’ tax. “Eventually, they run out of other people’s money and they come for you,” he tweeted on Monday, later arguing government “spending is the real problem.”
Republicans, for their part, cheered the demise of Wyden’s billionaires’ tax.
“It’s a win for the American people,” Senator Chuck Grassley of Iowa said Thursday. “If they had not backed away, in two years we would have been repealing it because it would not have been administrable.”
Hardest hit by the framework are Americans who make lots of money in ways that give them few legal options for sheltering their income. Those with huge salaries — athletes and entertainers at the peak of their careers, for example — would pay marginal rates of 50% on their salaries, plus state taxes that could bring their top rate above 60%.
Owners of businesses raking in tens or hundreds of millions of dollars could also be slammed. Some would see their top rates jump almost 12 percentage points, because the framework also broadens the number of high-income people who owe a 3.8% Medicare tax, which is already paid by investors and workers but can be avoided by some business owners.
Investors with windfalls of more than $25 million would also owe the 8-point surtax, though their top rate would hit only 31.8% because capital gains and dividends are taxed at lower rates than ordinary income.
In this group, wealth advisers say the most noticeable effect would be on families selling private businesses, where one transaction causes income to spike over the surtax threshold after years of more moderate tax bills.
“The people who are going to get hurt the most are the ones who are going to have a one-time wealth-generating event,” said Jeremiah Barlow, head of family wealth services at Mercer Advisors. By contrast, for those making $50 million year after year, he said, “8% is not going to be materially changing their lifestyle.”