Biden "Billionaires" Tax

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For data about how many taxpayers are affected, see the reference:

https://en.wikipedia.org/wiki/Alternative_minimum_tax#:~:tex….

Per the article: “Although the AMT was originally enacted to target 155 high-income households, it grew to affect 5.2 million taxpayers each year by 2017, raising $36.2 billion, or 2.4% of federal income tax revenue. The passage of the TCJA for tax year 2018, reduced the affected number to about 0.1% of all taxpayers. This number is expected to rise again in 2026 with the expiry of the individual provisions of the TCJA.”

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My bad - the original linked article didn’t mention anything about this proposal taxing unrealized gains. That’s a nonstarter so it isn’t realistic that it will pass. But seems like a poorly written article to miss the biggest change to taxation in ages…

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One thing I’ve always found interesting about the uproar over “wealth tax” is how it reconciles with property tax. In California, many counties pay something that roughly equates to 1.4% of the assessed value of their residence each year. Now, there is some funny business such as the gain in assessed value doesn’t always track the rise in real estate prices and you can deduct property tax in some other calculations… but, for anyone buying a new $1M house, you’ll be paying roughly $14k / year growing at roughly 3% indefinitely. In many respects this is a tax on “unrealized gains” … which then get taxed again if you ever realize them by selling the house.

You could argue that this is different because it covers localized expenses (roads, schools, etc…), but it is still clearly an asset-based tax that increases over time whether gains are realized or not.

On another unrelated note, I recently learned of some ridiculous tax dodge where people gift all their assets into a corporation and then only draw money out of the corporation to pay living expenses. This allows them to continuously exchange real estate assets in the corporation into more expensive real estate assets without cap gains.

There definitely needs to be some sort of reform covering all these dodges. It’s clear that those with money and resources will continue to know how to best manage the system to avoid taxes.

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In California, many counties pay something that roughly equates to 1.4% of the assessed value of their residence each year. Now, there is some funny business such as the gain in assessed value doesn’t always track the rise in real estate prices and you can deduct property tax in some other calculations… but, for anyone buying a new $1M house, you’ll be paying roughly $14k / year growing at roughly 3% indefinitely.

In CA Prop 13 restricts annual increase to 2% a year.
The state portion is 1% of assessed value.
Local additional taxes have to be approved by 2/3rds voter approval.

Mike

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A tax on unrealized gains seems fun.

You have 10 shares @ $100, they increase to $200.

You owe 20% of $1000, so $200.

So to get your money, you sell 1 share @ $200.

Oh wait, you got this share with a cost basis of $10, so now you owe capital gains on the same of the one share for $190, capital gains is 15% or 23-24% depending on income, but lets go with the 15%, so you owe about $30 now, leaving you with $170 to pay the $200. Better sell another share, pay more taxes.

Repeat every year the market goes up. Seems like a pretty big impact on BRK as I don’t think WEB has a lot of cash around to pay taxes. OTOH he did advocate for more taxes on billionaires.

Essentially it would probably end up taking the predicted $26 billion / year out of the market and into the US government, no idea how this would impact stock prices, but there would probably be a lot more games than even now. Owning that parking garage in Miami seems like a better deal.

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You have 10 shares @ $100, they increase to $200.
You owe 20% of $1000, so $200.
So to get your money, you sell 1 share @ $200.
Oh wait, you got this share with a cost basis of $10, so now you owe capital gains on the same of the
one share for $190, capital gains is 15% or 23-24% depending on income, but lets go with the 15%, so
you owe about $30 now, leaving you with $170 to pay the $200. Better sell another share, pay more taxes.

As it has been described, this isn’t a problem.
It isn’t a tax, it’s a floor on the tax rate.
So selling shares to pay the tax won’t incur tax.
(the sale would incur tax, but then the unrealized gain tax also incurs a tax, and you’d pay only the higher of the two, not both)

And presumably the value at each unrealized tax assessment day resets your cost basis to that level, so you don’t pay it over and over again.
In that sense, it’s an entirely workable tax.
However many years it takes your portfolio to reach $100bn, when you get there it’s worth only $80bn, no matter what happened along the way.
And a lot of capital gains tax is already paid.

There is only one big problem: what happens when stock prices go down?
If it goes up year 1 and you pay the tax on unrealized gains, then the stock price goes down year 2, what happens?
Do they do a cash refund the tax on unrealized losses as they taxed the gain on unrealized profits?
Or merely a tax credit? Or nothing?

The latter two would be a problem.
If the stock does an Enron and goes to zero, you’d want to get all the tax back, and with some reason.
Otherwise, in effect you’re paying tax on profits you never made and never got to benefit from.
If they refund it every year, the tax seems reasonably fair and workable.

Then you get to the next biggest problems:
What the heck is something worth? I foresee a lot of very well remunerated lawyers arguing how poor their clients are. This is messy, but can be done.

And what do you do if it’s something you can’t sell part of? Restricted shares, or an indivisible asset?
Do you get a loan from the government to pay your tax, payable if/when the asset becomes liquid or you die?

A lot of these things are already done in a lot of places: it resembles what happens when you emigrate from a lot of countries.
All your assets are all taxed on departure as if you had sold them, though in many cases the tax is deferred till when you actually do so.

Jim

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In that sense, it’s an entirely workable tax.

Hard for me to see this as entirely workable in any respect.

Let’s pretend for a moment thatI am a billionaire. Make that a multibillionaire, why not?

Now I may have my billions in stock and cash, in which case it’s easy. But let’s say I’m a billionaire with lots of “stuff”. Maybe islands in the Bahamas, yachts (plural), artwork, gold bars in vaults, 20 or so cars, estates in multiple countries, jewelry, and so on.

I need to have each and every parcel, bracelet, Rembrandt and Maserati appraised every year to see if it has gone up or down in value? What a nightmare! Luckily I can hire 200 appraisers to do it, but still - doesn’t anybody else see the potential for funny business when evaluating a potful of illiquid assets?

Luckily, this is probably unconstitutional at the outset. The 16th amendment gives explicit permission to tax “incomes”, and a USSC decision back in the 1920’s already faced the idea of whether or not unrealized gains are “income” and decided they’re not. Given the current makeup of the court, it’s doubtful this passes muster, or even Mamaroneck.

There are already tools to deal with this: the progressive income tax and the AMT. Why we would go shopping in the Valley of the Incalculable is beyond me.

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“There are already tools to deal with this: the progressive income tax and the AMT. Why we would go shopping in the Valley of the Incalculable is beyond me.”

Virtual signaling to the far left.

I’m ok with higher taxes but let’s do it more intelligently and based less on envy.

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There definitely needs to be some sort of reform covering all these dodges. It’s clear that those with money and resources will continue to know how to best manage the system to avoid taxes.

There definitely needs to be some sort of reform covering all these dodges. It’s clear that those with money and resources will continue to write the system to avoid taxes.

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<<The 16th amendment gives explicit permission to tax “incomes”>>

So we need amend that amendment. Politicians will find a way to put their hand in your pocket.

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And what do you do if it’s something you can’t sell part of? Restricted shares, or an indivisible asset?
Do you get a loan from the government to pay your tax, payable if/when the asset becomes liquid or you die?

This seems reasonable. But notice that, the more reasonable and feasible it gets, the more it resembles the tax code that is already in place. As it is, when you have unrealized capital gains, you effectively have a loan from the government, which we might call your ‘tax owed on unrealized capital gains’ loan. You pay back the loan when you, you know, realize the gains. This is also known as “paying your taxes on realized capital gains.”

What seemed like rich people unfairly avoiding taxes was, it turns out, just a delay in paying taxes.

And this already existing loan system has the big practical advantages of (a) making sure the taxpayer really has the gain she thinks she has, and (b) making sure she is in a position to pay the tax.

dtb

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Otherwise, in effect you’re paying tax on profits you never made and never got to benefit from.

That’s less unusual than one might think. For example New Zealand famously has no capital gains tax. But every year you have to pay income tax on the “virtual gain” of your foreign (Exception: Australian) stocks, on the difference between their price at year end versus beginning of the year - no matter whether you actually sold them or not (Alternatively you can choose to pay tax on 5% of their value).

As a former and probably again future NZ tax resident I personally hate it - but think it’s fair. It’s simple and gets rid of all kinds of clever tax buy/sell timing strategies (which of course is why I hate it - which in turn means it’s a fair system :slight_smile:

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Let’s pretend for a moment that I am a billionaire. Make that a multibillionaire, why not?
Now I may have my billions in stock and cash, in which case it’s easy…

I think that’s rather the point.
Most seriously rich people make their money with shares of stock.
So though they might own a lot of other stuff later on, the wealth would be taxed on the way up as the shares generate it.

What else is popular to make a billion?
Those making their money with real estate generally have lots of transactions along the way with clear market values.

Those lucky shareholders will later sell some stock to buy gold plated ekranoplans, but by then the income is taxed.
So, bottom line, if they taxed only financial assets with reasonably determinable values, they’d catch virtually all the big wealth.

Those who have already made their bundle, sold their shares, and bought other stuff all before the tax kicked in would be harder to catch, unless you do a one-time wealth tax.
But that’s not a large population.

It could work.
Some places have annual wealth taxes and the world doesn’t end.

I’m not advocating taxing unrealized gains, merely pointing out that the arguments against it definitely don’t include that it can’t be done reasonably effectively.

A more interesting thought is whether they would do this for corporations as well, and if so, how would that change Berkshire’s investment strategies?

Jim

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I will point out that most property taxes are based on the value of the asset - so this is a problem that has already been solved to some extent.

tecmo
…

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“Those lucky shareholders will later sell some stock to buy gold plated ekranoplans…”
——————————-
Learned another new word…

https://youtu.be/x22nVFTd8nI

ciao

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Some places have annual wealth taxes and the world doesn’t end.

I’m not advocating taxing unrealized gains, merely pointing out that the arguments against it definitely don’t include that it can’t be done reasonably effectively.

They sure do. Here in New Jersey, they have a property tax. Property is considered wealth and they tax it based on the assessed value. They do not like to increase the tax rate (though they do sometimes), so they increase the assessed value. That value is somewhat related to what other properties have recently sold for. But for me, I bought my house and lot for about $40,000 and it is now assessed for about $350,000, so my taxes have gone up from about $800/year to about $6,500/year. But whatever else it is, it is a tax on unrealized gain.

The world has not yet ended, but since my income has not increased since I retired, I worry.

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What seemed like rich people unfairly avoiding taxes was, it turns out, just a delay in paying taxes.

Except when the assets are passed on intergenerationally, in which case the step-up basis makes it tax avoidance. So we can’t tax unrealized gains ‘cause … complicated, and we can’t tax inheritance at cost ‘cause “death tax”.

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“Those lucky shareholders will later sell some stock to buy gold plated ekranoplans…”
——————————-
Learned another new word…

It’s a reference to one Hubertus Bigend, a fictional character.

(very mild spoiler alert…)
Over the span of the trilogy he gradually develops the persona of a Bond villain, and buys one.
Though not, as I recall, gold plated.

Jim

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Except when the assets are passed on intergenerationally, in which case the step-up basis makes it tax avoidance. So we can’t tax unrealized gains ‘cause … complicated, and we can’t tax inheritance at cost ‘cause “death tax”.

This to me is the crux of the problem. We have an estate/gift tax to supposedly avoid passing massive wealth between generations without the US government taking a very sizable tax. If the tax is being paid, then I have no problem with the step-up in basis. But, the wealthy have found ways around the estate tax.

I’d recommend aggressive action to close those loopholes rather than creating a new wealth tax. And there are other tweaks to the income tax, capital gains and dividend taxes that would be easier to implement to level the playing field some, rather than a new wealth tax.

That said, while I seriously doubt this proposal can pass Congress, I wouldn’t be upset if it did, pending clarification of details.

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… can’t tax inheritance at cost ‘cause “death tax”.

That phrase is a wonderful piece of spin.
Agree or disagree, I remain in awe of whoever penned and promoted it.

I like to ask people if they believe in the merits of dynastic wealth:
a small perpetual set of families with all the rocks, passing the loot down through the generations along the their chromosomes.

Once upon a time there was a strong consensus in the US that this was a bad thing.
But that’s before the phrase “death tax” was circulating, so it doesn’t get much air time : )

My own personal suggestion: (not that anybody cares)
Skip the silly step-up thing, of course.
0% inheritance tax on money you inherit from your parents in general, but some huge percentage on whatever subset of that your parents inherited from THEIR parents. Up to 100% tax rate on that.
Why this suggestion?
There is a visceral desire to give to one’s children so they may prosper, which is why estate/inheritance tax is always a hard sell.
But grandkids? Meh. Whatever.
So you get rich families, and they have one generation of rich kids, but it’s hard to get many dynasties.
Unless every generation makes a fresh fortune above (and presumably using) the funding they get handed, which isn’t so bad.

Jim

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