The Proposed Biden Wealth Tax Explained
An analysis of the proposed minimum tax on the wealthiest, explaining its unique approach of treating the annual growth of assets as taxable income.
Proposals from the Biden administration aim to increase the tax contributions of the wealthiest Americans as part of a national dialogue on tax fairness. A central proposal is the Billionaire Minimum Income Tax, often referred to as a “wealth tax” in public discussion, though its structure is different. The administration’s stated goal is to address situations where high-net-worth individuals may pay a lower effective tax rate than many middle-income households. This initiative seeks to redefine how income is calculated for this specific group to ensure they meet a minimum tax threshold.
The Billionaire Minimum Income Tax Proposal
The proposal’s formal name, the Billionaire Minimum Income Tax, clarifies its function as a minimum tax on a redefined concept of income. The plan targets the wealthiest 0.01% of Americans, fully applying to households with a net worth over $200 million and phasing in for those with a net worth between $100 million and $200 million. This high threshold ensures the tax applies to a very small fraction of the population.
The proposal would establish a 25% minimum tax rate on the total income of these households. This includes traditional income sources and the annual increase in the value of assets, even if those assets are not sold. If a qualifying household pays less than 25% of this expanded income in federal taxes, they must pay the difference to meet the minimum. Those already paying 25% or more would see no change to their tax liability from this provision.
Taxing Unrealized Capital Gains
A core component of the proposal is its treatment of unrealized capital gains. An unrealized gain is the increase in the value of an asset, such as stocks or real estate, that an individual owns but has not yet sold. For example, if someone bought a stock for $1,000 and it is now worth $1,500, they have a $500 unrealized capital gain. Under the current U.S. tax system, this gain is not taxed until the stock is sold.
This proposal would alter that dynamic for qualifying households by including the annual increase in asset value as part of their total income for that year. This method, known as mark-to-market taxation, means the appreciation of an investment portfolio would be taxed annually. The income of a qualifying taxpayer would be a combination of their ordinary income and the change in the value of their unsold investments. If a taxpayer earns $1 million in salary and their stock portfolio increases by $10 million, their income under this proposal would be $11 million, and the 25% minimum tax would apply to this expanded base.
Payment and Valuation Mechanics
The proposal includes mechanics for how the tax on unrealized gains would be paid. To address potential cash flow issues from taxing non-cash gains, the plan allows taxpayers to pay the liability over five years. For the first year the tax is in effect, this payment period is extended to nine years, preventing the need for forced sales of assets.
The plan also addresses years when assets decrease in value. If a taxpayer experiences an unrealized loss, such as from a stock market downturn, these losses can be used to offset other income. Furthermore, any taxes paid on unrealized gains would act as a prepayment. These payments generate a tax credit that can be applied against the final capital gains tax liability when the asset is eventually sold, preventing double taxation.
A primary challenge of this proposal is the annual valuation of non-liquid assets. While publicly traded stocks have clear market values, assets like private business interests or art collections do not. The proposal would require these assets to be valued annually, a process that can be complex and could lead to disputes over valuations.
Distinctions from a Traditional Wealth Tax
It is important to distinguish the Billionaire Minimum Income Tax from a traditional wealth tax. A classic wealth tax imposes a levy directly on an individual’s total net worth—their assets minus their liabilities—on a recurring annual basis. For example, a 2% wealth tax on a person with a net worth of $150 million would result in a $3 million tax bill, regardless of their income for that year. This type of tax is focused on the accumulated stock of wealth itself.
The Biden administration’s proposal is structured as an income tax and does not tax the total value of a person’s assets. Instead, it redefines “income” for a specific group of taxpayers to include the annual appreciation of those assets and then applies a minimum tax rate to that newly defined income. The tax base is the flow of new income and gains within a year, not the accumulated stock of wealth. This structure avoids some constitutional questions associated with direct wealth taxes by framing the levy within the existing income tax system authorized by the Sixteenth Amendment.