When Joe Biden ran for the Democratic presidential nomination, he opposed the taxes on wealth that two of his competitors, Senators Elizabeth Warren and Bernie Sanders, had proposed. In a speech to a small wealthy group at a Los Angeles fundraiser in 2019, he stated that he wouldn’t punish them with higher taxes.
He’s changed his mind.
Biden now proposes what he calls a “Billionaire Minimum Income Tax.” When you read that, you might think he wants to impose a minimum income tax on billionaires.
Not quite. It’s not just billionaires. The tax would apply to any household with a net worth of $100 million or more. Note to Joe: $100 million is only one-tenth of $1 billion. And it’s not just on income. He would tax unrealized capital gains by calling them income.
Abraham Lincoln once said, “How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg.” Well, calling unrealized capital gains income doesn’t make it income.
Unrealized capital gains are wealth, not income. So Joe Biden is proposing a tax on wealth.
Taxes on wealth are one of the worst kinds of taxes for four main reasons. First, wealth taxes are punitive, something Biden once understood. They take from people simply because they’re wealthy.
Second, they are one of the most distorting taxes around. They reduce the incentive to acquire wealth and so lead to less investment than otherwise. Less investment means less capital for workers to work with, which leads to lower productivity, which leads to lower wages than otherwise.
Third, even if they had no effect on incentives, wealth taxes take money from people who are using it productively. They’re not like taxes on cigarettes. (I also oppose high taxes on cigarettes, but that’s another story.)
Fourth, they’re hard to assess. If your assets are illiquid, how does the IRS know your net worth is $100 million or more? And how does it know what your unrealized capital gain is? It doesn’t, without a lot of resources devoted to estimation.
Shockingly, Harvard economist Jason Furman, who chaired President Obama’s Council of Economic Advisers, favors Biden’s proposed tax. In Tuesday’s Wall Street Journal, he notes that taxpayers would be able to spread their income taxes over five years. Yippee!
And what if the capital gains disappear after the first year? Furman writes, “[T]hey would have paid only a fifth of the taxes upfront and wouldn’t be on the hook for future tax payments.” What about that fifth already paid? Furman seems to be saying “Tough luck.”
March 30, 2022