Here’s how Democrats want to tax billionaires’ capital gains

By CNN

Published October 25, 2021 3:06 PM

CNN

By Tami Luhby, CNN

Racing to find alternate ways to pay for their massive budget reconciliation package, congressional Democrats are now targeting the wealth of the very richest Americans.

The proposal would tax billionaires on the gain in value of certain assets every year, instead of only at the time of sale, as is currently done.

Details remain scarce, as lawmakers try to swiftly cobble together the complicated plan so it can be released in the coming days. It would likely only hit those at the very, very top of the wealth ladder.

“It would help get at capital gains, which are an extraordinarily large part of the incomes of the wealthiest individuals, and right now escape taxation until they’re realized,” Treasury Secretary Janet Yellen told CNN’s Jake Tapper on Sunday, adding that she wouldn’t call that a “wealth tax.”

The billionaire tax plan could bring in as much as $250 billion in revenue, House Speaker Nancy Pelosi told Tapper on Sunday. It would have to be coupled with other new tax measures to cover the party’s sweeping social spending package, which could cost around $2 trillion.

Democrats are in this position because they’ve been blocked from raising the corporate tax rate and top marginal individual income tax rate to levels at or closer to where they were before Republicans slashed taxes in 2017. Arizona Sen. Kyrsten Sinema has refused to support these measures, and Democrats need the votes of all 50 members to pass the budget reconciliation measure in the Senate.

“It’s a process of elimination,” said Howard Gleckman, senior fellow at the nonpartisan Tax Policy Center. “After everyone has rejected everything else, this is kind of what’s left.”

Taxing wealth

Though many Democrats have long wanted to tap into the wealth held by those at the top to pay for social programs and address income inequality, they have generally failed to do so.

Sens. Bernie Sanders and Elizabeth Warren proposed levying a tax on the net worth of the ultra-wealthy during their recent presidential campaigns, and Warren unveiled the Ultra-Millionaire Tax Act earlier this year.

President Joe Biden has floated proposals to tax wealthy Americans’ unrealized capital gains at death, separate from the existing estate tax, and to require their heirs to pay tax on the full increase in value of the asset when they sell it, not just the gain from the time they inherited it, closing the “step-up” loophole.

But none of these measures made it into last month’s House budget reconciliation proposal, which largely depended on raising tax rates until Sinema made her opposition clear.

Complicated proposal

In addition to encountering deep-pocketed opposition from powerful interests, taxes on wealth and unrealized capital gains could be very complicated to administer, experts said. Oregon Sen. Ron Wyden, who is spearheading the current effort, has been working on a similar proposal for two years.

Publicly traded assets, such as stocks, would not be that difficult to handle. Investors now have to determine the value of their capital gain — or loss — when they sell the assets and report it on their tax returns.

But much of the wealthiest Americans’ net worth is also tied up in assets that are harder to value year-to-year, including private companies, entrepreneurial ventures, mansions, artwork and other collections. They would likely have to hire appraisers to determine the annual change in worth, which could spark years-long battles with the Internal Revenue Service, Gleckman said.

Other issues: Billionaires who have lots of assets but little cash on hand would have to find the money to pay the tax. And, like a tax on wealth, the levy on unrealized gains could be subject to legal challenge. The rich would likely also take steps to avoid the tax, reducing the amount of revenue it would raise.

Adding such a tax would increase the pressure on the IRS, which already struggles with its workload, and on the Treasury Department, said Garrett Watson, senior policy analyst at the Tax Foundation, a right-leaning think tank.

“It would be easier for policy makers politically and from a policy perspective to raise tax rates rather than make very complicated, untested changes to the tax base like this,” Watson said. “They come with their own set of risks.”

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