Biden's Terrible Billionaire Tax

By raising the effective tax rate on capital gains, the proposal would reduce U.S. saving, discourage entrepreneurship, and decrease economic output.


Say what you will about the Biden administration's approach to tax-the-rich populism: It's creative. But creativity does not necessarily translate to sound tax policy.

At the State of the Union address, President Joe Biden reintroduced a proposal for a "billionaire minimum tax." Not to be confused with the global minimum tax (part of international negotiations at the Organisation for Economic Co-Operation and Development, or the OECD), the corporate book minimum tax (enacted in the Inflation Reduction Act last year), the individual alternative minimum tax (which has been law since 1969), or the old corporate alternative minimum tax (which was repealed in 2017), the billionaire minimum tax is relatively novel in terms of its design—but new doesn't mean sound either.

Currently, people pay taxes on gains in the value of an asset, like stock appreciation or the growth of a privately held business, when the asset is sold. If an asset is held for under a year, gains face ordinary income tax rates. If held for longer, gains face reduced rates, topping out at 23.8 percent. Deferral of capital gains taxes reduces the effective tax rate, and in some cases, capital gains tax liability can be completely avoided due to a provision that excludes capital gains at death

Biden's proposal would tax unrealized gains—the increase in an asset's value, even before it's sold. Taxpayers with net wealth above $100 million would have to pay a minimum effective tax rate of 20 percent on an expanded measure of income that adds unrealized capital gains to more conventional sources of income, like wages, business income, and investment income. If ordinary taxes paid as a share of the expanded definition of income fell below 20 percent, the taxpayer would owe additional taxes to bring the rate up to 20 percent. Any additional taxes paid as part of the minimum tax would be treated as prepayments of future capital gains tax liability when gains are actually realized.

By raising the effective tax rate on capital gains, the proposal would reduce U.S. saving, discourage entrepreneurship, and decrease economic output. 

The real risk to growth comes from raising taxes on the returns to risky investments: Investing in startups and new technologies that may provide huge returns—both socially in terms of innovation and productivity and privately for the investor—would be discouraged by higher taxes. Meanwhile, the tax burden would rise for domestic savers, but not for foreign savers, giving them a relative advantage. In response, domestic saving and income would fall, and foreigners would finance a greater share of U.S. investment opportunities, enjoying a greater share of the returns. 

An annual tax on paper gains would be conspicuously complex. The largest administrative problems relate to valuing non-tradable assets like privately held businesses and taxing illiquid taxpayers with large gains on paper but little cash on hand to pay a minimum tax bill. The proposal attempts creative solutions, like formulaic rules and longer payment periods, but each would introduce new complexities, opportunities for tax planning, and the potential for disputes with the already-overwhelmed Internal Revenue Service. 

Even with creative rules, the billionaire minimum tax could still result in the U.S. Treasury paying cash refunds to high-net-worth individuals in periods of high volatility. Notably, when the proposal was first introduced in October 2021, the stock market was at an all-time peak: Excluding a slight increase in December 2021, the S&P 500 has not reached that level since. At that time, the possible windfall of taxing all those paper gains looked tempting and lucrative, but since the stock market wilted in 2022, that is less appealing. 

Given these problems, it's unsurprising the idea hasn't caught on around the world. As even prominent left-leaning advocates of taxing unrealized gains note in a paper last year, "No income tax system to date has been able to tax the full return on wealth which includes unrealized capital gains."

Almost every country taxes capital gains only when they are realized. Moreover, the U.S. policy of taxing long-term capital gains at a lower rate than ordinary income is common; most countries in the OECD tax capital gains at a reduced rate relative to the rate they tax ordinary income, as well as at a reduced rate relative to the U.S. capital gains rate. 

Ultimately, the billionaire minimum tax is another manifestation of a disconnect between spending aspirations and tax philosophies.