Centrist Sen. Joe Manchin (D-W.Va.) on Tuesday shot down President Biden’s new plan to raise $360 billion in revenue by imposing a 20 percent minimum tax on billionaires, a proposal the president formally unveiled Monday in his budget request to Congress.
Manchin says he doesn’t support the president’s plan to tax the unrealized gains of billionaires, which would set a new precedent by taxing the value an asset accrues in theory before it is actually sold and converted into cash.
“You can’t tax something that’s not earned. Earned income is what we’re based on,” he told The Hill. “There’s other ways to do it. Everybody has to pay their fair share.”
“Everybody has to pay their fair share, that’s for sure. But unrealized gains is not the way to do it, as far as I’m concerned,” he added.
Manchin’s opposition means Biden’s proposal is likely dead only a day after the White House unveiled it.
It could be significantly restructured to avoid taxing unrealized gains, which would pose the big challenge of trying to make up the lost revenues.
The problem with taxing just the regular income of billionaires is that many of the nation’s richest individuals, such as Jeff Bezos and Elon Musk, have been able to pay little or nothing in income tax by not declaring income.
Instead, the ultra-rich often can take out loans secured by the value of their assets to finance their lavish lifestyles.
“Here’s what they do. They go to their accountant. They tell their accountant, ‘Make sure I don’t make any income, any salary.’ And then they say, ‘Make sure I can buy, borrow and die.’ And nobody knew anything about that years ago, and now people are pretty up on it,” said Senate Finance Committee Chairman Ron Wyden (D-Ore.), who has announced his own proposal to tax the unrealized gains of billionaires.
Wyden says that imposing a minimum 20 percent tax on billionaires is about making sure they pay a similar percentage of their wealth in taxes as middle-class Americans.
He called Biden’s proposal “solid.”
Structuring a tax on unrealized capital gains is complicated because the value of assets can fluctuate.
“The problem with that particular tax is that it’s a tax on unrealized gains,” said Senate Republican Whip John Thune (S.D.), a member of the Finance Committee.
“It’s essentially taxing people before they actually get the income, and that seems like a really dangerous precedent in tax law because if you have a gain one year and then a huge loss the next year, how’s the government going to pay people back for their losses?” he said.
“We’ve always had a principle in our tax policy that a gain has to be actually realized, income has to be received before it can be taxed, and this completely undermines that principle,” he added. “It’s a wealth tax basically, but I think it’s a dangerous precedent.”
Wyden said his proposal would account for individuals and families who see the values of their assets decline after they pay tax on unrealized gains.
“What we’ve always said is that losses would be considered as well. We’ve talked about it. The president has talked about it,” he said.
The White House budget office in a press release Monday explained that the tax would apply only to the wealthiest 0.01 percent of households, those with more than $100 million in assets. Half the estimated revenue it would produce would come from billionaires.
“It would ensure that, in any given year, they pay at least 20 percent of their total income in Federal income taxes,” the Office of Management and Budget said.
Tax and financial planning experts warn that Biden’s proposal would be very difficult to implement and would result in a huge tax hit on the very rich.
Mallon FitzPatrick, a managing director at Robertson Stephens, a boutique wealth management firm, said the proposal would make it tougher to pass on legacy wealth.
“A lot of this proposal is aiming at people who are just slowly growing assets and not paying any tax because they’re not realizing any gain and are expecting to pass on wealth to their heirs or whomever without paying taxes on it,” he said. “The mega, mega wealthy rely on that.
“That’s why I think it’s unpopular,” he said.
But he added it’s “hard to enforce.”
“You’re asking for the first time that I know of for people to report net worth,” he said. “They’re going to self-report or have a professional report how wealthy they are.
“It’s just [very] complex as I read it,” he remarked. “It’s not fully fleshed out.”
Under Biden’s plan, taxpayers with more than $100 million in wealth would be required to report to the IRS on an annual basis the total estimated value of their assets in specified classes as well as their liabilities.
More liquid assets such as stock would be valued by using year-end market prices to determine unrealized capital gains.
The increase in value of nontradeable assets such as businesses and real estate would be determined by what the Treasury Department is calling a “conservative floating annual return” calculated by the five-year Treasury rate plus 2 percentage points.
Taxpayers would be able to pay off the big initial tax hit in nine annual installments.
FitzPatrick called the proposal a “derivative” of Sen. Elizabeth Warren’s (D-Mass.) proposal to implement a 2 percent annual tax on the net worth of households and trusts between $50 million and $1 billion and a 1 percent annual surtax — or 3 percent overall — on the net worth of households and trusts above $1 billion.
He said the proposal potentially could tax the unrealized gains of assets going back years or decades.
Warren on Tuesday praised the president’s proposal as something that would address some of the constitutional concerns raised about her own plan, which has been criticized by some Republicans as an unconstitutional seizure of wealth.