"President Biden's "billionaire minimum income tax," which the White House announced Monday as part of its 2023 budget, is a serious tax-reform proposal. By proposing a large broadening of the tax base, which would raise revenue in a fair and efficient manner from high-income households, this plan could solve many of the problems that have bedeviled earlier approaches to taxing the income from wealth.
Currently taxes are collected on capital gains only when an asset is sold, not when an asset increases in value. This matches the payment of taxes with the cash that is generated to pay those taxes. But waiting to tax until gains are realized through the sale of an asset has three major disadvantages. First, linking taxation to realization encourages people to hold on to assets. These gains escape taxation at death, which turbocharges the incentive not to sell and prevents capital from flowing freely to those who can make the best use of it.
Second, taxing gains when they are realized is unfair because it allows two people with similar income or wealth to be taxed at different rates for arbitrary reasons. For example, if you hold stocks that appreciate, they will be taxed less than similar stocks that do not appreciate but do pay a dividend.
Finally, taxing only realized gains narrows the tax base and requires higher federal tax rates and more kinds of taxes to meet revenue goals.
Proposals to tax unrealized gains (or wealth directly) have posed policy objections, implementation challenges and constitutional concerns. Mr. Biden's team thought through these issues and came up with the most workable proposal to date. The plan -- which would apply only to households with a net worth of $100 million or more -- would levy a minimum tax of 20% on all income plus unrealized capital gains. The levy on unrealized capital gains would be a prepayment on taxes that would be due on the asset's future sale. Assets would be valued at their market value. If that is not available the Treasury Department, through simple rules of thumb like original cost plus an adjustment, would determine market value. The prepayments would be spread over five years with no requirement to prepay for taxpayers who primarily have illiquid assets. However, if a taxpayer is exempted for having primarily illiquid assets, a deferral charge will be applied upon the sale of an asset which would effectively increase the tax rate on capital gains to compensate for the benefit of delaying tax payment. More than half the revenue from this proposal would come from households worth more than $1 billion.
The Biden plan cleverly addresses several problems with taxing unrealized gains. Not requiring advance payments by people with primarily illiquid wealth would allow payments to be spread over multiple years, ensuring that the tax doesn't force innovative founders to sell prematurely, thus separating them from control of their businesses.
By requiring people with sufficient liquid wealth to pay taxes on their unrealized illiquid gains and having a top-up payment on the sale of illiquid assets for everyone else, the plan also wouldn't create an artificial incentive for people to shift into illiquid assets to avoid the tax. Simple rules to calculate approximate returns on illiquid wealth that Treasury would be instructed to devise -- with a reconciliation when an asset is actually sold -- would make calculating prepayments much easier than calculating estate taxes, which requires exact valuations.
Mark-to-market taxes can create problems for people whose assets fall in value after Dec. 31, leaving them with a tax bill for phantom gains. Spreading out tax payments over multiple years would solve this problem for most taxpayers, because if the gains disappear, they would have paid only a fifth of the taxes upfront and wouldn't be on the hook for future tax payments.
Finally, shifting capital-gains policy between administrations creates opportunities for avoidance. Requiring prepayment protects this plan against future capital-gains changes and minimizes perverse incentives.
The Biden proposal deserves the same critical scrutiny that should be applied to anything that might become law. Clever tax lawyers may discover loopholes in the proposal that need to be closed, or, conversely, there may be ways to make the capital taxation easier and more flexible. The proposed rates, repayment periods and other parameters are a starting point and ultimately could be changed as well as mixed and matched with other changes to capital taxation.
Tax reformers have long focused on broadening the tax base and minimizing distortions by treating different economic decisions as similarly as possible in the tax code so that decisions can be made for economic reasons, not tax reasons. I believe the tax system should raise revenue in a more progressive manner, and the Biden proposal is a great place to start.
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Mr. Furman, a professor of the practice of economic policy at Harvard, was chairman of the White House Council of Economic Advisers, 2013-17." [1]
The richest in Lithuania need more security than others, security, for which the Conservatives are going to pay dearly. Therefore, the rich of Lithuania must invest more into that security than before. Prepayment of the tax by the richest on the increase of the wealth is a good idea for Lithuania as well.
1. Biden's Better Plan to Tax the Rich
Furman, Jason.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 29 Mar 2022: A.15.
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