Voltaire once remarked that the Holy Roman Empire was neither holy, nor Roman nor an empire. Perhaps if he saw the Biden administration’s latest proposal for a “Billionaire’s Minimum Income Tax” he would say that it is neither a billionaire’s tax nor a minimum income tax.
The tax, which would apply to all households worth more than $100 million and not just billionaires, is a wealth tax under another name. Not only is the tax base defined by total wealth as opposed to annual income, but it would also apply to the growth in value of non-liquid assets.
Under the administration’s proposal, taxpayers with net wealth of at least $100 million would be required to pay a minimum of 20% on the combination of their income and the increase in value of all their assets. Any affected taxpayer whose tax liability ended up lower than this 20% threshold would have to pay the difference.
I wrote last year about this type of underhanded wealth tax, known as mark-to-market taxation. Under a mark-to-market system, taxpayers would owe taxes not only on realized capital gains, but also on unrealized capital gains. In other words, not only would affected taxpayers owe taxes on the increase in value of their assets from when they were acquired to when they were sold, but they would also owe tax on the increase in their assets’ values from year to year whether or not they were sold.
There are all kinds of obvious problems with such a scheme, which are pointed out every time such a system is floated and promptly ignored by progressives on a crusade to tax the already-heavily-taxed rich. Nevertheless, I persist.
The first and most obvious problem is that valuing non-liquid assets is extremely difficult. While assets such as stocks are priced by the market frequently, other assets, such as artwork or non-publicly-traded business shares, are not. Establishing the change in value in such assets on a year-to-year basis is a recipe for countless costly legal disputes between taxpayers and the IRS.
This problem already exists to a much smaller extent with the estate tax. When Michael Jackson died in 2009, his estate valued the rights to his image at just $2,105. The IRS, on the other hand, valued it at $434 million. The dispute took twelve years of litigation in order for a judge to set the value of Jackson’s image at a far more modest $4 million.
Now imagine if the IRS had to, on an annual basis, grapple with countless celebrities and their ever-shifting public perceptions over the value of the rights to their images. And that’s just one type of non-liquid asset the IRS would have to consider in a valuation of a taxpayer’s net worth.
Another major issue is also administrative. There’s a reason unrealized capital gains aren’t taxed under our current tax code — until they are actually realized, on-paper gains are just that. So if the IRS is taxing on-paper gains, it would have to figure out some way to handle on-paper losses as well.
Look back to February of this year, when Mark Zuckerberg’s company Meta saw a huge plunge in value. Zuckerberg lost nearly $30 billion in on-paper “wealth” in a single day. If the IRS was taxing Zuckerberg for Meta’s on-paper gains, would it send him a massive refund check when Meta shares crashed?
By the same token, another problem with taxing non-liquid wealth is that tax bills can sometimes exceed the ability of taxpayers to actually pay them. That’s particularly a concern for start-up business founders, who may have a great deal of taxable “wealth” under the administration’s proposal but relatively little cash. The result could be to make start-ups more vulnerable to being snapped up by larger competitors as entrepreneurs seek cash to pay their tax bills, or at least face additional risk in the form of taxes in the case of business success.
Wealth taxes have become popular in progressive circles as a means to target rich taxpayers, but they are administratively unworkable and fly in the face of tax fairness. Taxing Americans for on-paper income is only likely to make the tax code far worse.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.