How will the income tax of billionaires work?

Mr. Wyden’s detailed proposal—an annual income tax on the unsold publicly traded assets of nearly 700 billionaires—such as stocks—comes as Democrats scramble to find up to $2 trillion over a decade to cover the costs of their agenda. are struggling. He has plenty of ideas that may exceed that figure, but few are precious enough to garner the support of enough Democrats to get through a narrowly divided Congress.

Lawmakers’ reaction in the coming days will determine whether the idea moves forward or whether it joins a plethora of other tax proposals that Democrats have floated and rejected this year amid objections from moderates, progressives, or both.

Mr Wyden’s 107-page plan would end billionaires’ ability to defer capital-gains taxes indefinitely, and it would impose multibillion-dollar taxes on people like Amazon.com Inc. founder Jeff Bezos and Tesla Inc. CEO Elon Musk. tax bill, which criticized the plan. It is expected to raise hundreds of billions of dollars over a decade, although the actual amount will depend on stock prices and whether the courts find the tax unconstitutional.

The money will come from the wealthiest taxpayers, many of whom can currently keep their reported income and tax bills low. Under today’s tax system, they do not have to pay capital gains taxes until they sell their assets, and they can borrow against that money to finance their lifestyles.

The proposal, if implemented, is likely to generate a substantial portion of revenue in the first few years from company founders, who would pay tax on the high value of their businesses on a zero or very low cost basis. This includes people who started companies in garages and dorm rooms and turned them into tech giants.

The scheme will expedite tax collection on future benefits and now tax those benefits which could have been avoided for decades. After that, the annual revenue from the scheme will depend on the volatile asset values ​​of the tradable shares.

“The billionaire income tax will ensure that billionaires pay taxes like working Americans every year,” said Mr. Widen (D., Ore.). “No working person in America thinks it’s fair that they pay their taxes and billionaires don’t.”

Republicans have said the idea would hurt economic growth, and House Democrats have viewed Senate tax talks with dismay. The House Ways and Means Committee last month approved its proposed tax increase, which stipulates higher tax rates on corporations, high-income individuals and capital gains, which affect the very wealthy but focus on the unrealized capital gains of billionaires. Does little to focus.

House members shrugged off President Biden’s idea of ​​taxing capital gains on death and are now seeing the Senate consider an even more transformative capital gains tax-policy change on a tight deadline.

“It’s a public relations idea,” said Rep. Dan Kildee (D., Mich.) “This is not a real policy suggestion.”

Here’s how the Wyden plan would work.

It will start in 2022 and will apply to those who have a net worth of $1 billion or an annual income of $100 million for three consecutive years—2019, 2020 and 2021—to begin with. They will remain in the new tax system until they have had three straight years in which their assets and income are less than half that limit.

First, as the new system rolls in, those affected will have to pay a tax as if they had sold their publicly traded assets. So someone who bought $2 billion of stock in 2010, which is now worth $20 billion, would have added $18 billion in income, taxed at a top long-term capital gains rate of 23.8%. That $4.3 billion in initial taxes could be paid over five years.

Then, each year, they have to pay tax on the gain in that year’s value. The unrealized loss can be carried forward for future gains or carried forward by three years to offset past gains and claim refund.

A different set of rules apply to nontraditional assets such as real estate and closely held businesses. Those gains will not be taxed each year to avoid the difficulty of assessing the annuity value.

Instead, they will be taxed as capital gains upon sale or transfer or on the death of the individual. Without any other changes, that rule would make the tax preference for such properties taxed annually on publicly traded stock because the tax on real estate and businesses can be deferred. The Wyden plan covers interest charges on non-traded assets such as real estate, and is designed to equalize the burden on those properties with the burden on publicly traded properties.

The proposal will add interest charges to the regular tax rate but cap the total tax at 49% of the gain in value. That cap plus the way interest is calculated can give people an incentive to move to non-trading assets. But the loss rules are less lenient than those of publicly traded assets.

The Wyden plan includes a series of rules designed to limit billionaires’ ability to evade tax, and they will be quickly tested as well-financed taxpayers struggle with the Internal Revenue Service over what their is near.

For example, gifts and bequests, except to spouses, would be treated as triggering capital-gains tax. Donations will not be for charity.

Many trusts will be subject to this tax system if they have at least $100 million in assets or $10 million in income; Those lower limits are intended to prevent billionaires from dividing their assets among trusts to avoid tax.

The plan also has rules on how billionaires can use trusts, deferred compensation, annuities, life insurance, tax-advantaged small-business stocks and tax breaks in low-income “opportunity areas” created in the 2017 tax law.

Mike Kosnitzky, co-head of private-property practice at law firm Pillsbury Winthrop Shaw Pittman LLP, has spoken with a dozen or more ultra-wealthy clients potentially affected by the plan over the past few days.

“There are some who want to be very proactive and do whatever is necessary” to reduce the tax, Mr Kosnitzky said. “Some people are determined to say, ‘Whatever is going to happen, it’s going to happen.’ They are mostly my Democrat clients.”

He said the proposal would prompt the very wealthy to shift from publicly traded properties to other properties that would not be taxed every year. They may still be able to use complex strategies that they have turned to over the years such as transferring assets to foundations and other tax-advantaged vehicles. New methods are likely to emerge.

“Smart investment bankers and asset managers are already thinking about how to financially engineer products that will emulate existing stocks but are harder to value,” Mr. Kosnitzky said.