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How Should Billionaires Be Taxed?

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This week, Democrats entertained a new sort of tax to pay for their spending plans. It would have specifically targeted billionaires, taxing unrealized capital gains on their stocks, bonds and cash.

The proposal didn’t make it into the latest version of President Biden’s plan, which instead includes a surtax on annual incomes of $10 million or more. Taxing income instead of wealth means that the merely very wealthy could get hit with higher taxes than the richest of the rich. But the impulse to impose more tax on billionaires is clearly gaining momentum, and debates about how best to do it are intensifying.

Billionaires, whose collective wealth increased by 70 percent since the start of the pandemic, derive most of their fortunes from assets that aren’t taxed until they are sold. Some have found ways to avoid these taxes — temporarily or in some cases for a lifetime — by taking out loans backed by their assets and by relying on other complex strategies. This summer, a blockbuster report by ProPublica showed that some of the richest Americans, including Jeff Bezos, paid no federal income taxes in some years.

The short window when the billionaire tax was part of the Democrats’ spending package stoked the long-running debate about whether a special tax on extreme wealth is fair, or even constitutional. “I don’t like the connotation that we’re targeting different people,” Senator Joe Manchin III, Democrat of West Virginia, said of the tax, effectively dooming the measure in a closely divided Congress.

But the proposed tax raised questions about how a tax aimed at the unique features of billionaires’ wealth would work if — or when — lawmakers revisited the issue. Here are three of the biggest questions about taxing billionaires, and how experts are addressing them.

Are billionaires the best target?

A tax that applies to just over 700 people — the wealthiest, best-resourced 700 people — comes with a risk that many will find a way not to pay it, critics of a billionaire tax argue.

Aswath Damodaran, a finance professor at New York University’s Stern School of Business, said that the proposal would have created a huge windfall of tax revenue in the first year, when assets are first marked to market, but after that it would be “trench warfare year after year to see how much you could collect.”

A billionaire could, for instance, transfer liquid assets like stocks to illiquid assets like real estate and art, where different rules might likely apply (as in the Democrats’ ill-fated proposal).

Others argue that taxing tradable assets, like executives’ shares in their companies (the source of many of the biggest fortunes), gives the government a leg up in this game. Such a tax is hard to avoid because it “directly targets corporate stock in publicly traded companies and such data is already reported,” said Emmanuel Saez, an economics professor at the University of California, Berkeley who studies tax policy and inequality. “There’s just no way those founders would have to say they don’t own these companies that they run.”

Theoretically, the leaders of extremely successful public companies could take them private to avoid such transparency, but that is not an easy undertaking to cut a personal tax bill. They could also avoid taking companies public in the first place.

Another criticism: Taxes with a larger base tend to be more stable. “People will find ways to game, and the smaller the tax base, the bigger the risk, especially if they’re rich, smart, well-resourced people,” said Shivaram Rajgopal, a professor of accounting and auditing at Columbia Business School. “So you ideally want a bigger base if possible.”

For this reason, he prefers the compromise that survived in Mr. Biden’s proposed framework: an additional 5 percent tax on annual incomes above $10 million and an extra 3 percent tax on incomes above $25 million. This would apply to around 20,000 people, mostly millionaires, rather than 700 billionaires. “It spreads the net a bit wider,” Professor Rajgopal said.

Is taxing unrealized gains a good approach?

Because the stock market has good years and bad years, so would a billionaire tax. That creates two potential problems.

One is that, for the government, the tax’s revenue would be unpredictable. There’s an easy solution to that: “The federal government can easily borrow,” Professor Saez said. What’s more, “We have other forms of taxes to balance this out, like the income tax that most of us pay,” said Chuck Collins, the director of the program on inequality at the left-leaning Institute for Policy Studies and author of “The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions.”

The other problem, for the taxpayers, is that payments would be unpredictable, causing problems for those with large fortunes on paper but little cash on hand. But most are not worried about Mr. Bezos or Elon Musk being able to come up with the money to pay a tax on their wealth. “We already know that the billionaires borrow massively for their living expenses to avoid selling assets and paying capital taxes,” Mr. Collins said. “I trust these same lenders will help them out.”

Some supporters of a billionaire tax say that its unpredictability could be reduced by taxing total wealth rather than just capital gains, as Senator Elizabeth Warren of Massachusetts and other Democrats have proposed in the past. Some critics say that passing such a tax would open the door for similar levies on less wealthy people. (Mr. Musk made that argument this week: “Eventually, they run out of other people’s money and then they come for you,” he tweeted.)

Could billionaires be taxed via existing parts of the tax code?

A special tax on billionaires is a “complete experiment,” Professor Damodaran said, “something that I think you don’t want to try for the first time without having a sense of checking every weak spot in it.” But there are other ways to raise taxes on the wealthiest Americans.

The stepped-up basis, a provision that resets the cost basis of assets when they are inherited, allows for decades of wealth appreciation to go untaxed. In a way, a billionaire tax addresses this problem, since capital gains would be taxed when they occur, regardless of when an asset is passed between generations. Some argue it would be more straightforward simply to scrap the stepped-up basis.

Changes to the stepped-up basis were proposed by President Biden but failed to make it into the final agreement among Democrats. (Attempts by previous administrations met a similar fate.) Critics of the changes said it would force those who inherit small businesses and farms to sell them in order to pay taxes. “That’s, I think, fixable,” Professor Damodaran said. He suggested exempting categories of assets, such as one home.

Congress could also raise the capital gains tax rate to match the income tax rate. It could close the carried interest loophole, which allows investment managers at private equity firms to treat their income as capital gains for tax purposes. Giving the I.R.S. more resources to enforce the current tax code could also raise more revenue from the richest Americans, whose finances are often fiendishly complex.

Supporters of efforts like the billionaire tax say these tweaks to the existing rules wouldn’t preclude also introducing a new tax on the wealthiest Americans. “We have to look at any tax policy in an ecosystem because one tax alone will always have its own limitations and potential side effects,” Mr. Collins said. “But if you put it in a context with some other revenue raisers, I think it helps.”

What do you think? Is a billionaire tax a viable idea? Is there a better approach for taxing wealth? dealbook@nytimes.com.

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