Taxing billionaires has always been a struggle in the United States. Loopholes and the best accountants money can buy have enabled the ultra-rich to avoid paying as much taxes as they can. But in October of this year, Senate Finance Chair Ron Wyden proposed a Billionaires Income Tax that wants to end that.
The billionaire tax proposal is something complicated, but important to understand. To provide you with an idea of what it entails, we have broken the proposal down step by step. We’ll discuss what this proposal is, its importance, and the impact it can have.
Additionally, we have provided a brief glossary on some taxation terms at the end of this article to clarify everything. Now, let’s dive deep into the basics of the Billionaire Income Tax proposal.
Why is the Billionaire Tax Proposal Important?
According to a report from the US Treasury, the top 1% of taxpayers evaded approximately $163 billion in taxes in 2020, making up about 28% of total unpaid taxes.
Over the next decade, this would translate into a massive $7 trillion in lost tax revenue. To put this number into perspective, it equals all the taxes paid by the lowest-earning 90% of taxpayers.
Billionaire Elon Musk has recently been in the news for publicly discussing this issue. As Observer reported, A ProPublica report alleged that Musk, worth $152 billion, paid less than $70,000 in federal income tax in 2015 and 2017 and nothing in 2018. You read that right – a billionaire who practically paid no taxes.
This means that Musk’s overall true tax rate for the five years between 2014 and 2018 is only 3.27 percent. The actual tax rate is the amount of tax paid divided by the increase in net worth. This is much lower than the average American household’s tax rate.
This is the behavior the billionaire tax proposal wants to correct. But how do billionaires evade taxes in the first place?
How Do Billionaires Evade Taxes?
We first need to understand that billionaires like Jeff Bezos and Elon Musk don’t get their wealth from annual income. Instead, the significant majority of their wealth relies upon their stock holdings.
When a person’s money is in stocks, they own that wealth, but it’s not tangible cash until they sell it. But when selling, a capital gains tax of 20% applies. So how do these billionaires fund their lifestyles without selling their stocks?
Well, they take out loans while using their stocks as collateral. Collateral is an asset, like a home or your stocks, that someone who wants to borrow money offers as a way to qualify for a loan.
When billionaires take out these loans, they have to pay interest, but today they get massive loans at rates under 1%. This is much less than the 20% they would pay on taxes by selling their stocks.
For example, in 2019, Elon Musk took out $61 million by using five of his properties as collateral. During that time, he also used 40% of his shares in Tesla as collateral for other loans. This money is what he uses to bankroll his expensive lifestyle.
If Musk had decided to sell his shares or properties, he would have had to pay capital gain tax on his earnings. But by borrowing the cash, his shares and properties continue to increase in value while at the same time avoiding any taxes.
So, What is the Billionaire Tax Proposal?
As proposed by Democrat Senator Ron Wyden, the Billionaires Income Tax would apply to about 700 American taxpayers. Its purpose is to make sure “the wealthiest people in the country pay their fair share towards historic investments in child care, paid leave, and addressing the climate crisis.”
These paying taxpayers would be people with more than $100 million in annual income or more than $1 billion in assets for three consecutive years.
How Would the Billionaire Income Tax Work?
Tradable assets, such as stocks owned by these billionaires, would be taxed. Whether they sell or not this asset, they will still have to pay taxes on them. However, the billionaire tax will not tax their accumulated wealth but their profit from these stocks.
For example, if you own $1 million in Facebook stocks, and make a yearly profit of $200 thousand, this yearly profit would be taxed, not the $1.2 million you now own.
The proposal also has rules to make the transition into the Billionaires Income Tax easier. For example, first-year billionaires may decide to pay the resulting tax from their tradable assets over five years.
It is also important to note that business owners need to own a majority of their company’s stocks to be considered a majority owner. This is why they will also have the chance to treat up to $1 billion of tradable stock in a single corporation as a non-tradable asset. It will help make sure that the taxation proposal will not interfere with the ability of an individual to maintain their controlling interest.
How Billionaires are Responding to the Proposal
The response to the Billionaire Tax proposal has been a mixed bag. “Republicans are unified in opposition to the proposal. And some have suggested it would be challenged in court,” AP News reported.
There are also Democrat critics, such as West Virginia Sen. Joe Manchin, who told CNN reporters, “I don’t like it. I don’t like the connotation that we’re targeting different people.”
Billionaires like Elon Musk, John Catismatidis, Leon Cooperman, and more have also condemned the proposal. Musk, CEO of Tesla and founder of SpaceX, has been particularly vocal about his opposition to the Billionaire Tax.
Elon Musk argued that the issue is that the government spends too much money and that this tax would not fix anything. Furthermore, he tweeted that “Eventually, they run out of other people’s money, and then they come for you,” suggesting that one day everyday people will be affected by the direction the tax proposal is taking.
Yet, critics have pointed out that Tesla has been reliant upon government aid. For example, Musk received a $465 million loan from the US Energy Department back in 2010 and more recently took a $2.9 billion contract from NASA in 2019 to build a moon lander.
But not every billionaire agrees with Musk. A spokesperson for investor and philanthropist, George Soros, told the AP that Soros is supportive of this proposed tax.
Warren Buffet and Bill Gates have not commented yet on the proposal. But they have been vocal in the past about how the ultra-rich do not pay enough taxes and should pay more, even if that includes them.
There are also a lot of democrats in favor of it. Big players like House of Representatives Speaker Nancy Pelosi and Senator Bernie Sanders have voiced their support.
So, What Now?
Whether the Billionaire Tax proposal becomes legislation or not is hard to tell at this point. But Bob Lord, a tax lawyer and associate fellow at Institute for Policy studies, pointed out that even if this proposal doesn’t pass, it still shows how concerns about financial inequality are gathering momentum.
On average, the wealthiest Americans paid 15.8% in federal income taxes between 2014 and 2018, according to ProPublica. As they point out, this is lower than the rate a worker making $45,000 per year might pay if you include Medicare and Social Security. This is one of the many figures that show the lack of regulations and the injustices in the taxation of the rich.
Whether you agree with Wyden’s Billionaire Tax proposal or not, one thing is clear: billionaires are not paying their fair share of taxes, and something needs to be done, soon.
Federal income tax: The taxing of salary. There are seven tax brackets, ranging from 10% to 37%. Where someone lands in the brackets depends on their salary; the higher your salary, the higher your position in the tax bracket.
Capital gain taxes: The capital gains tax is the taxation on the profit from an investment when the asset is sold. This includes stock shares. This tax does not apply to unsold stocks or capital gains, meaning they will not be taxed no matter how long the shares are held or how much they increase in value.
Tax Rate: A tax rate is the percentage at which an individual or corporation is taxed.