Biden pushed a minimum tax for billionaires – here’s what Elon Musk would pay

President Joe Biden drew loud cheers during his State of the Union address on Tuesday night when he proposed a new tax on the wealthy.

“Pass my billionaire minimum tax proposal,” Biden told Congress. “Because no billionaire should pay a lower tax rate than a teacher or a firefighter.”

Biden’s billionaire tax, however, also hits top millionaires. And rather than just raising tax rates, it actually taxes wealth, including unsold stocks, bonds and real estate.

According to the White House tax explainer, which Biden first proposed last year, the billionaire minimum tax would require households with a total net worth of more than $100 million to pay a minimum effective tax rate of 20% on a broad measure of income that includes unrealized income. capital gains.

Under this plan, households would calculate their effective tax rate for the minimum tax. If it fell below 20%, they would have to pay additional taxes to bring their effective rate up to 20%.

The big change is to tax unrealized capital gains as income. Currently, if a taxpayer owns a stock, bond, real estate, or other asset, they generally do not owe capital gains until they are sold. Biden proposes taxing “unrealized capital gains,” meaning a tax on the annual capital appreciation of the paper even if it isn’t sold.

So if a tech founder owns $1 billion in stock and the value of the stock increases to $1.5 billion during the year, they will have to pay up to $100 million in tax. on the $500 million paper gain, even though he didn’t sell a single one. share.

The White House says it would account for losses with credits and by spreading payments and credits over time. Taxpayers can spread the first payment – ​​which is a tax on their total wealth – over nine years. Paying tax on annual gains after that can be spread over five years, which the White House says “will smooth out year-to-year fluctuations in investment income.”

Yet taxing unrealized gains is increasingly complicated with today’s wealthy — most of whom have fortunes tied to volatile tech stocks that swing wildly from year to year.

Take the example of Elon Musk:

• If the billionaire’s minimum tax had started in 2020, he would have had to tax $31 billion on his total net worth, which at the start of the year was $156 billion.
• In 2021, his net worth grew by $121 billion, so he owes $24 billion in taxes for the year.
• In 2022, however, his net worth plummeted by $115 billion on You’re heredecline in stocks. If he has already paid the 2021 tax, he will have paid billions in taxes on the assets he no longer has.
• The government would then have to send him a reimbursement check for $23 billion. Or any credit for 2022 would take years to use up and depend on Tesla’s stock recovering.
• If Musk had to take out a margin loan to sell stock to pay the 2021 tax, those costs would not be offset by a tax credit.

“Applying the tax to tech stocks and other volatile assets is tricky,” said Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center. “What if the multi-millionaire is rich in stocks, but has little money to pay taxes? Or is unable to borrow large sums against the volatile stock? And what if after a rapid rise , the stock is dropping fast? Would the government write big refund checks?

The Biden administration says that in addition to restoring “fairness” to the tax code, the billionaires’ minimum tax would generate $360 billion in additional revenue over 10 years. The White House said the tax would only apply to one-hundredth of one percent (0.01%) of the wealthiest US households. He said more than half of the income would come from households worth more than $1 billion.

Opponents say that in addition to being potentially unconstitutional, the billionaire minimum tax would be difficult to administer — especially for an already understaffed IRS.

“Realization-based taxation is the norm around the world,” said Erica York, senior economist and research director at the Tax Foundation’s Center for Federal Tax Policy. “And for good reason, because the alternative of taxing unrealized capital gains would be extremely complex and administratively costly.

Rosenthal added, “The super-rich have a lot of assets, which would require a lot of appraisals. How would the IRS determine if the multi-millionaires filed correctly?”