Democrats Release Billionaires Tax Plan. Sen. Manchin Doesn't Like It. - Barron's

Amazon.com founder and Executive Chairman Jeff Bezos.

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Democrats unveiled a proposal to tax billionaires’ unrealized capital gains in a bid to raise sufficient revenue to fund President Joe Biden’s multi-trillion dollar social spending bill.

Sen. Joe Manchin (D., W.V.), however, told reporters Wednesday he did not “like” the measure, but did not express immediate opposition to it.

“I don’t like the connotation that we’re targeting different people,” he said. People who “contributed to society and create a lot of jobs, invest a lot of money, and give a lot to philanthropic pursuits, but it’s time that we all pull together and row together.”

Manchin’s vote is pivotal as Democrats need all 50 Senate votes to pass legislation through a process called reconciliation, which allows them to bypass the 60-vote filibuster.

Party leaders initially suggested rolling back President Donald Trump’s 2017 corporate and personal income tax cuts, but have moved toward alternative revenue-raising strategies, such as the billionaires’ tax, after facing resistance from moderate party members.

Democrats have insisted that the new tax would not be a wealth tax per se. Instead of taxing total wealth, the proposal, released by Senate Finance Committee Chairman Ron Wyden on Wednesday, taxes only the increase in the uber-wealthy’s assets. Under current tax laws, there is no requirement to pay capital-gains taxes unless an asset is sold.

“Working Americans like nurses and firefighters pay taxes with every paycheck, while billionaires defer paying taxes for decades, if not indefinitely,” Wyden wrote in the proposal. “The tax code’s preferences for capital income over wage income fuel the concentration of dynastic wealth among the nation’s billionaires.”

The measure would likely create a sizable tax bill for billionaires such as Jeff Bezos, Bill Gates, Mark Zuckerberg, and Elon Musk. Tesla (TSLA) CEO Musk has been vocal in his opposition to the tax.

“Who is best at capital allocation — government or entrepreneurs — is indeed what it comes down to,” Musk said in a tweet Monday. “The tricksters will conflate capital allocation with consumption.”

House Speaker Nancy Pelosi said a billionaires’ tax would bring in between $200 billion and $250 billion, which is still short of the $2 trillion Democrats need to fully fund Biden’s plan.

Here are five things to know about Wyden’s proposal:

Who would the new tax proposal apply to?

The new measure would apply to about 700 taxpayers making more than $100 million in annual income or holding more than $1 billion in assets for three consecutive years.

How much would billionaires be taxed?

Affected people will need to give the Internal Revenue Service a detailed account of how much the assets they own lost or gained each year. The first year, they would have to pay annual unrealized gains taxes in liquid assets at 23.8%.

After that, they would face an annual capital gains tax on the gain in value of tradable assets for that year. Unrealized losses could be carried backward up to three years.

When would it go into effect?

If passed, the proposal would go into effect in 2022. Historical gains would also be taxed when the new system starts, meaning that any gains made on assets bought in the past will still be eligible for the tax. Billionaires have the option to pay the initial tax over five years.

Which assets would be taxed, and how?

Tradeable assets that are easily valued on an annual basis, like stocks, will be marked to market each year.

“This means that billionaires will pay tax on gains or take deductions for losses, whether or not they sell the asset,” Wyden said.

For nontradable assets, such as real estate, the bill imposes a new “deferral recapture amount,” which Wyden said was similar to interest on tax deferred while the person held that asset. The deferral recapture amount would be calculated when the person sells that asset. The total tax amount is capped at 49%, which may give people an incentive to shift to nontraded assets.

How would they enforce it?

The bill has several proposals aimed to limit billionaires’ ability to avoid the tax through tax loopholes. For example, gifts and bequests would trigger a capital gains tax; exceptions are to spouses and charity donations. It also has a provision requiring billionaires who want to expatriate to pay the tax on their fortune before giving up their citizenship.

Pass-through entities in which a billionaire holds at least 5% stake, or a stake valued at $50 million, would also have to report the gain of the assets, so affected taxpayers don’t hide their assets in other entities.

The plan would test the IRS’ ability to act as a more stringent enforcement agency, which is another one of the initiatives Democrats are considering to raise revenue. For the IRS to increase enforcement effectively, its proposed budget would need to increase to $20 billion from $12 billion, calculated Joyce Chang, analyst at J.P. Morgan.

For Fundstrat analyst Tom Block, there is still a long way to go before the measure gets adopted into the Democrats’ final reconciliation bill, having to likely face a hearing and bypass reservations from some moderate Democrats, he said.

If it passes Congress, the proposal still faces an uphill legal battle, said Stifel analysts in a note.

“Because unrealized gains are not ‘income’ under the 16th Amendment to the U.S. Constitution, we do not see a wealth tax standing up to U.S. court scrutiny,” they wrote.

“Politically, it’s a viable strategy,” Block said. “I think there’s a real problem to making it work.”

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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