The ultra-wealthy in America have all sorts of tricks at their disposal to avoid paying their fair share of taxes, which is why it’s not uncommon for a billionaire to end up with a lower-percentage effective tax rate than an average working American. President Joe Biden’s proposal to set a 20% minimum tax rate on the wealthiest households would end that inequity and help pay down the nation’s budget deficit.
Biden’s plan, part of the budget he announced last month, is far less sweeping than various progressive proposals for taxing the wealthy, some of which would be based not just on income but on accumulated wealth itself. Biden’s approach wouldn’t do that, though it would mean a major change in the way income is defined for the wealthiest Americans.
Most of the mega-wealthy keep much of their wealth in stocks and other investments, of course. Those assets are not normally taxed as they increase in value year to year, but rather are taxed only when they are cashed out. For someone with enough holdings, it’s possible to borrow money against the value of those investments and then live off the borrowed money, rather than liquidating the investments and having to pay taxes on them.
This is at base a tax-avoidance strategy, since borrowed money isn’t taxed. Federal economists estimate that between 2010 and 2018, 400 billionaire families paid an average effective federal tax rate of a little over 8%, which is far less than millions of working Americans pay.
Biden’s plan would begin with the premise that households worth $100 million or more must pay at least 20% in taxes on their income. And income for those families would be redefined to include gains in the value of investments that have not yet been liquidated.
In that sense, it’s less a tax hike than a requirement for tax pre-payment, since those taxpayers in theory would ultimately owe these taxes on growth anyway when they cash out the investment. Any tax payments those families have to make on those investments under Biden’s plan would be counted toward whatever they ultimately owe when they do liquidate the investments. But this would end situations where families simply leave their investments in place for years or decades, refraining from liquidating them and just living off loans and other assets.
As a White House summary document of the proposed minimum tax puts it, “This approach means that the very wealthiest Americans pay taxes as they go, just like everyone else.”
Polls have long shown that Americans believe by wide margins that the mega-wealthy should be paying more than they do in taxes, as a matter of basic fairness. Biden’s proposal would accomplish that with far less pain to those lucky few than many competing plans out there.
— Tribune News Service
