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Finance Chairman Seeks ‘Billionaires Income Tax’

In the midst of consideration of two huge infrastructure bills, Finance Committee Chairman Ron Wyden, D-Ore., has released a proposal for a special new tax on high-net-worth individuals, those with more than $1 billion in assets or more than $100 million in income for three consecutive years. Taxpayers who fit these criteria will continue to be liable for the tax until a taxpayer’s income and assets drop below one-half of the income and asset thresholds for three consecutive taxable years. The tax would apply to unrealized gains, as described below.  

Tradable Assets Would be Marked-to-Market

Under the plan, tradable assets like stocks would be marked-to-market every year, resulting in unrealized gains and losses being reported. High-wealth taxpayers would have to pay tax on the gain and take deductions for losses on their assets annually. These taxpayers would be able to carry forward losses, and in some circumstances, carry back losses for three years.   

Non-Tradable Assets Would Incur Interest

Non-tradable assets, such as real estate or business interests, would not be taxed annually. Instead, when high-wealth taxpayers sell non-tradable assets, they would pay capital gains tax plus an interest charge. The interest charge, or “deferral recapture amount,” is the amount of interest that would be due on tax owed if the asset had been marked-to-market each year, but the tax had been deferred until sale.  

Specifically, the deferral recapture amount is calculated by allocating an equal amount of gain to each year in the holding period, determining how much tax would have been owed on the gain in each year, and assessing interest on unpaid tax for the time the tax was deferred. The interest rate would be the applicable federal short-term rate plus one point. The AFR is currently 0.22 percent, so the interest rate applied would be 1.22 percent. No interest accrues prior to the date of enactment of the proposal or the first tax year the individual is subject to the Billionaires Income Tax, whichever is later. 

Transition Rules

The proposal contains rules to transition to the Billionaires Income Tax. For example, the first-time tradable assets are marked-to-market, affected taxpayers may elect to pay the resulting tax over five years. They also may elect to treat up to $1 billion of tradable stock in a single corporation as a non-tradable asset, which will help to ensure that the proposal does not affect the ability of an individual who starts a successful company to maintain a controlling interest.  

Finally, the proposal contains anti-abuse rules to prevent avoidance of the tax.  

Group of Millionaires Urge Passage, Manchin’s a Maybe

A group of millionaires is urging Congress to include the Billionaires Income Tax in the Build Back Better legislation. In a letter to Congressional Democratic leaders, a coalition of 250 millionaires state that the tax would raise $250 billion by “sensibly reforming the income tax system by annually taxing the biggest source of billionaire income that now goes largely untaxed: investment gains.” The group argues that tax would boost “fiscal responsibility” and advance a “historic movement towards a truly fair tax code.”  

Key Senator Joe Manchin, D-W.Va., at first opposed the tax, which he viewed as targeting a particular group of taxpayers. He offered, instead, a “Patriotic Tax” that would impose a minimum 15% tax on individuals who otherwise escape federal taxes due to loopholes. It is reported that Manchin is warming up to the idea, so some type of high-wealth tax may make it into the final bill, which has yet to be scheduled for a vote. Although the outlook is uncertain, the proposal should be voted up or down by the end of this year. 

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