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Here’s how Democrats want to tax billionaires to pay for their social spending plans

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.

Oregon Sen. Ron Wyden, chair of the Senate Finance Committee, released on Wednesday the details of the complicated and controversial plan that he’s been working on for at least two years.

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. The rich often borrow against these holdings to build more wealth and fund their lifestyles, while avoiding adding to their annual income tax tab.

It would only hit those at the very, very top of the wealth ladder, roughly 700 people — those with more than $1 billion in assets or with reported income of more than $100 million for three consecutive years. People like Amazon founder Jeff Bezos and Tesla CEO Elon Musk.

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For tradable assets, such as stocks, billionaires would pay capital gains tax, currently 23.8%, on the increase in value and take deductions for losses annually. They’d be able to carry forward the losses to offset future taxable income and capital gains, and in certain circumstances, to carry back losses for three years.

The senator also devised a novel approach to handle non-tradable assets, such as real estate and interest in businesses, which make up much of the wealthy’s net worth but are harder to value year-to-year.

These assets would not be taxed annually. Instead, billionaires would pay capital gains tax, plus an interest charge, when they sell the holding. The charge would be the amount of interest due on the levy had the asset been subject to annual capital gains tax and that tax had been deferred. The rate would be the applicable federal short-term rate plus one point, which would total 1.22% currently.

To transition to the new marked-to-market system, billionaires could elect to pay the first tax levy over five years. And they could choose to treat up to $1 billion in tradable stock in a single corporation as a non-tradable asset, which is aimed at allowing those who found successful companies to maintain their controlling interest.

“The Billionaires Income Tax would ensure billionaires pay tax every year, just like working Americans,” Wyden said. “We have a historic opportunity with the Billionaires Income Tax to restore fairness to our tax code and fund critical investments in American families.”

Funding the budget reconciliation package

Lawmakers are trying to swiftly cobble together the ways to pay for their sweeping social spending package, which would also include imposing a 15% minimum tax on corporations, so they can release it in the coming days.

But it’s unclear if all Democrats are on board with the billionaires tax, particularly in the House, where some are raising concerns about whether the levy is a workable solution. Democratic Sens. Joe Manchin of West Virginia and Mark Warner of Virginia, one of the wealthiest members of Congress, are also voicing resistance.

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The billionaire tax plan could bring in as much as $250 billion in revenue, House Speaker Nancy Pelosi told CNN’s Jake Tapper on Sunday. But additional tax and revenue measures would be required to cover the cost of the budget reconciliation package, which has an estimated price tag of 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.

Soaring wealth

The proposal to tax unrealized capital gains comes at a time when better-off Americans have seen their net worth skyrocket, thanks to soaring stock prices and real estate values during the pandemic.

US household wealth hit a record $141.7 trillion in the second quarter, up 21% during the pandemic, according to an Oxford Economics analysis of Federal Reserve Bank data. The gains continue to be heavily skewed, with those in the top income quintile accounting for 73% and those in the top 1% enjoying 36% of the increase, respectively.

Meanwhile, Americans in the bottom income quintile saw their household net worth grow by just 1% during the pandemic, according to the analysis.

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.

Publicly traded assets, such as stocks, would not be as 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 one issue that had long been a sticking point was annually valuing non-tradable assets including private companies, entrepreneurial ventures, mansions, artwork and other collections. Even under Wyden’s plan, billionaires would likely have to hire appraisers to determine the annual change in worth, which could spark years-long battles with the Internal Revenue Service.

And, like a tax on wealth, the levy on unrealized gains could be subject to legal challenge, threats of which are already percolating. It’s one reason why Wyden is framing his proposal as an income tax, but legal scholars are already battling over whether the measure would withstand a court battle.

Democrats have a dozen ways to tax the rich that raise no serious constitutional issues, including higher rates and a lower estate tax exemption, tweeted Daniel Hemel, University of Chicago Law School professor.

“Why do the one thing for which constitutionality actually isn’t super-clear?” he tweeted.

The Constitution gives Congress the power to levy taxes, such as tariffs on commerce. However, it places limitations on so-called “direct taxes,” though the definition of these has long been unclear. The 16th Amendment, which was ratified in 1913, established Congress’ right to impose a federal income tax. Also, an early 20th century Supreme Court ruling upheld the ability of Congress to levy an estate tax.

Other issues: Billionaires who have lots of assets but little cash on hand would have to find the money to pay the tax. 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.”

This story has been updated with additional information.

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CNN’s Lauren Fox and Manu Raju contributed to this report.

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