There is a raging debate in the halls of Congress, in the media, and in society whether the country’s billionaires should be forced to foot the bill for such things as rebuilding the nation’s infrastructure. There isn’t a great deal of sympathy for billionaires like Leon Musk or Jeff Bezos. Most people believe that these billionaires get away with paying less than their fair share, often less than the middle class. The argument goes a step further: Some of the rich use the system as it is to build their wealth. Others say that taxing the rich beyond the average taxpayer’s ratio is simply a socialist way of sharing wealth, which is certainly not the way of a free market economy like ours. During the debates in the media, there were charges that a new billionaire’s tax is “un-American, Communist, and simply ethically wrong.”
To appreciate the intensity of the debate it is important to understand the difference of what the basis for the tax would be, whether it should be on income or wealth. If taxed based on wealth, billionaires do not have to pay taxes until the assets are sold, which means that they will get away with paying taxes for years and even decades. Even when they do finally relinquish control of the assets that are subject to capital gains tax, they are able to find a loophole and avoid paying taxes altogether or minimize what they owe the government. On the other hand, if the tax was based on income, the mere fact that someone’s valuation of assets goes up would trigger a tax immediately. In short, any money they make would be subject to tax right away.
Strangely, the collective wealth of America’s billionaires increased by 70 percent since the onset of the Covid-19 pandemic and under the current tax system most of that gain will not be taxed. In fact, many of these billionaires build most of their fortunes from assets that aren’t taxed until they are “sold,” meaning they continue to build their fortune without paying a dime for taxes. This summer, a blockbuster report by ProPublica showed that some of the richest Americans, including Jeff Bezos (net worth of approximately $194 billion), paid no federal income taxes in some years.
So much for taxing billionaires, which led to dealing with the wealthy in general. To increase tax revenues, the Biden Administration proposed an additional 5 percent tax on annual incomes above $10 million and an extra 3 percent tax on incomes above $25 million. This would apply to around 20,000 people, mostly millionaires, rather than 700 billionaires, according to one Columbia University professor.
So how would the government know how much tax revenue they will actually get? Economists say the government like any business entity needs to have a budget and projections of their revenues and expenses. They will do exactly what the billionaires do now. Said the expert: “We already know that the billionaires borrow massively for their living expenses to avoid selling assets and paying capital taxes.” The borrowing is a customary way for the rich to live well while keeping their taxable assets away from the IRS.
So, it isn’t just going after the billionaires that Congress is wrestling with. They know fully well that Americans will not shed any tears for Mr. Bezos or Mr. Musk if they are forced to pay more in taxes. They are looking to extract more from the “wealthy.” It was President Ronald Reagan who reduced the tax rate for the wealthy from 70%, all the way down to 28%. The wealthy offers the government a much larger target which is why Biden is focused on taxing them.
What is fascinating is that some constitutional experts even argue that a federal wealth tax is unconstitutional. Wealth taxes, they say, violate Article I, Section 2, Clause 3 of the U.S. Constitution, which forbids the federal government from assessing “direct taxes” that aren’t apportioned equally among the states. A direct tax is a tax on something like property or income. An indirect tax is a tax on a transaction: for example, a sale or a gift. Barring a victory before the conservative-leaning Supreme Court or an arduous amendment to the Constitution, the federal government may be shut out of taxing wealth.
The Democrats were in a bind. They have promised the American people many reforms ranging from more spending on new social programs to a massive infusion of money for climate control. They need to come up with $1.5 trillion (originally $3.5 trillion) to pay for all those promises. There were also many new tax initiatives that even some Democrats had problems with, so they began to shave down the numbers. When it became questionable whether they would be able to have enough support for the various tax changes including a new minimum corporate tax, they turned once again to the billionaire’s tax, which also faces opposition and possibly might not muster a constitutional test.
One of the opponents of a new billionaire’s tax and other corporate tax changes was Democratic Senator Joe Manchin (W. Va.). After trimming back his original proposal and making many other changes, the President is hoping to bring the Democratic naysayer on board. In the next few weeks, the drama will play itself out with the likelihood that there may be a compromise that is significantly less than the Administration wanted. Some are predicting that there will be an ongoing stalemate especially with a split Senate.
The ramifications of what transpires with the tax bill will be significant. With the 2022 mid-term elections looming, the success or failure of the new tax measures may very well be a central issue in the elections. As I reviewed the government’s budget proposals, some of it looked very familiar from the Trump days. Budgets for more social programs, climate change and refugees were of course missing but rebuilding the infrastructure was pretty much across the board.
Taxing billionaires and extracting more from the wealthy is on the surface very much appropriate. My concern, especially in our community, is that the rich be given the means to continue to support our chinuch system and social services. It is for that reason that the tax needs to be proportionate and fair.