In his upcoming budget, President Joe Biden proposes reviving the wealth tax, a concept popularized by his rivals in the Democratic presidential primary two years ago.
The proposal — now dubbed the "Billionaire Minimum Income Tax" — includes a few improvements over the 2020 version. Nonetheless, it remains a convoluted mess whose primary benefit could be achieved by simply eliminating a loophole in the current tax code.
A core difficulty faced by early wealth tax proposals is uncertainty over whether they are constitutional. The Constitution stipulates that any direct tax on citizens be levied such that each state pays the same amount per capita, an onerous requirement that makes it almost impossible to impose a wealth tax.
The 16th Amendment, however, made income taxes legal. So, rather than levy a 2% tax on wealth each year, as Sen. Elizabeth Warren envisioned, Biden's plan would levy a onetime charge of 20% whenever an asset increases in value.
Structural Issues
This structure is similar to the familiar capital gains tax, with one significant wrinkle: The tax is owed regardless of whether the underlying asset is sold.
The problem is that the taxpayer may not have enough cash on hand to pay the tax.
To mitigate this, the president's proposal allows taxpayers to pay over time — up to nine years from when the tax first goes into effect. An additional provision allows owners of illiquid assets to defer their payments for even longer periods, but with interest.
There is also the question of what happens if the value of the asset falls. Consider an early investor in the dot-com boom who saw her paper wealth evaporate as the market crashed. Would she have received a credit against any future taxes owed?
The proposal also puts very long-term investors — the type who are inclined to ignore the booms and busts of the market — at a disadvantage.
They may be forced to sell at the peak, but they may not have the means to buy back during the trough. So they necessarily become more focused on the short term, with an eye toward recouping enough cash gains to at least cover their tax liability.
