Here’s the Neat Trick of Biden’s Billionaire Tax

President Biden is trying to pull off a neat trick with his so-called billionaire tax plan: to raise taxes on the wealthy without directly taxing wealth.

The 16th Amendment to the U.S. Constitution gives Congress “power to lay and collect taxes on incomes.” Wealth is not income, so courts have found that straight-ahead wealth taxes are unconstitutional.

Biden’s plan gets around that large obstacle by taxing billionaires on the increase in their wealth. That gain, the administration argues, can be considered income: If your horse farm or your Renoir painting doubles in value, that increase can be thought of as income — just like wages from flipping burgers — even if you don’t realize the gain by selling.

Setting up the tax this way — as opposed to as an explicit wealth tax such as the one proposed by Senator Elizabeth Warren, Democrat of Massachusetts — increases the chance that it will pass muster with the Supreme Court (although Warren and her backers say her plan is also constitutional).

“It’s about income,” Jason Furman, a Harvard economist who served as chair of President Barack Obama’s Council of Economic Advisers, told me Monday. “I see no reason the court should say no.”

The twist, Furman said, is that wealth taxes poll considerably better with the American public than income taxes do. By couching the billionaire tax as being on income rather than wealth, the administration might be scoring points with the Supreme Court but losing points with voters.

Biden was apparently encouraged by the positive reception of a similar tax plan proposed by Senator Ron Wyden, Democrat of Oregon. When Wyden introduced the latest version of his billionaire tax in October, he said, “It clearly connects in some of the most challenging political communities in the country.”

Furman said Biden’s plan modifies Wyden’s in ways that make it more likely to survive challenges in Congress and the courts. “This really does reflect an attempt to say, if you had to legislate, what could be actually workable,” he said.

Biden included the billionaire tax proposal on Monday as part of his budget plan for the fiscal year beginning in October. The proposal includes a minimum tax of at least 20 percent on the income of American households worth more than $100 million. The tax would apply only to the top 1 percent of the top 1 percent of households, with more than half of its proceeds coming from billionaires, the budget plan says.

Daniel Shaviro, a tax expert at New York University School of Law, wrote in an email on Monday that although he believes the Biden tax is constitutional, “the current Supreme Court might very well strike it down.”

Shaviro wrote that the Supreme Court might revive a “basically defunct doctrine” from a case decided in 1920, Eisner v. Macomber, which held that income that’s not actually realized (such as the gain in an asset’s value) cannot constitutionally be taxed. That would be unfortunate, he wrote, because “the legal academy predominantly agrees that this doctrine from the Macomber case is both obsolete (dating back at least to Helvering v. Bruun, a 1940 case) and wrong.”

Eric Zwick, an associate professor at the University of Chicago’s Booth School of Business, said the billionaire tax is a little bit like a conventional capital gains tax, except with the tax paid over time based on the best estimate of the value of the assets each year. That would make it like a withholding system, with taxpayers paying ahead of time for a tax that will eventually come due. As it is now, a lot of capital gains don’t get taxed because heirs don’t have to pay tax on the assets’ increase in value from when they were bought to when they were passed down.

There are lots of complications, though, including the difficulty of measuring the value of illiquid assets (like horse farms). Taxes on gains in illiquid assets would not be assessed annually — although that leads to other complications. Zwick said, “There are other ways to raise this that seem simpler,” such as increasing existing tax rates and closing loopholes.

Number of the week


The estimated increase in nonfarm payroll employment in the United States in March, according to the median of economists’ forecasts collected by FactSet. That would be down from 678,000 in February. The Bureau of Labor Statistics is set to release the official number on Friday.

Quote of the day

“Subsidizing banks to borrow excessively and take on so much risk that the entire banking system is threatened is just like subsidizing and encouraging companies to pollute when they have clean alternatives.”

— Anat Admati and Martin Hellwig, “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It” (updated edition, 2014)

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