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Democrats are proposing a billionaires income tax—here's how it would work

UNITED STATES - OCTOBER 26: Sen. Ron Wyden, D-Ore., leaves the Senate Democrats luncheon in the U.S. Capitol on Tuesday, October 26, 2021.
Tom Williams | CQ-Roll Call, Inc. | Getty Images

Senate Democrats have released details on their proposed billionaires income tax, or BIT, which would effectively change how capital gains are taxed for the richest Americans and help fund President Joe Biden's infrastructure legislation.

The changes, written by Senate Finance Committee Chairman Ron Wyden, D-Ore., would apply to the approximate 700 billionaires earning over $100 million in annual income for three consecutive years or who have more than $1 billion in assets.

Right now, investors pay capital gains taxes when they sell an investment and realize a gain. Wealthy Americans often get around this by holding on to investments until the time of their death and passing them on to heirs without ever paying capital gains taxes on the gains.

At the same time, they use a financial strategy called asset-based lending, meaning they borrow money against their investment portfolio to pay for their lifestyles without selling their investments. The low-interest loan isn't taxable or reported as income.

Among other changes, Wyden's plan would eliminate these loopholes. Billionaires would have to pay tax on gains (or take a deduction for losses) for tradable assets, including stocks and bonds,each year, whether they sell them or not.

It would not apply to assets like real estate or a business interest, which would be taxed as capital gains when they are sold or transferred to someone else, or when the owner dies. Owners would also be charged interest.

That could mean some very large tax bills for a few households. In a simple example, if an impacted taxpayer had $1 billion in tradeable assets that grew to $2 billion over the course of one year, they would pay $238 million in taxes at the 20% top capital gains rate plus the 3.8% net investment income tax.

The first year would likely be the most significant in terms of revenue generation. Billionaires would pay taxes on all of their unrealized gains over five years. Gabriel Zucman, associate professor of economics at the University of California, Berkeley, wrote on Twitter that the first year of implementation is akin to a "one-time wealth tax of 23.8% on billionaires' equities."

He estimates the 10 richest billionaires in the U.S. — including Elon Musk, Jeff Bezos, Bill Gates, Larry Page, Mark Zuckerberg and others — would pay $275 billion collectively right off the bat. Of course, the figure will change depending on their net worths, which fluctuate daily.

Wyden estimates BIT would raise hundreds of billions of dollars. Republicans say the tax changes would hurt economic growth.

It is not clear that BIT will make it anywhere other than Wyden's desk. Democratic Sens. Krysten Sinema of Arizona and Joe Manchin of West Virginia have said they do not want to increase taxes on wealthy Americans, and Democrats need all 50 senators on board to pass their legislation. Additionally, the courts could rule that the tax is unconstitutional.

BIT is also different from the wealth tax that other progressives, like Sens. Elizabeth Warren, D-Mass., and Bernie Sanders, I-Vt., have proposed. Under their wealth tax, the richest Americans would pay a 3% total annual tax on wealth exceeding $1 billion.

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