A New National Property Tax?
Democrats Settle On New Tax On the "Super Wealthy." Where Have We Seen That Before?
The big news this week thus far is that Democrats appear to have settled on a new tax on unrealized capital gains on about 700 US billionaires to help “pay for” a $1.5-2 trillion budget “reconciliation” bill.
That bill is likely to contain all sorts of goodies that we’ll learn about in the coming days, including funding a new “climate corps” to plant trees, extended child care tax credits, and lots of money for pre-kindergarten child care, perhaps “means-tested."
It will also contain gimmicks such as limiting some new handouts to 5 years so they don’t “cost as much.” Such bills are “scored” by the Congressional Budget Office over 10 years. And we know that once a new handout begins, the pressure to continue it will be intense.
House Speaker Nancy Pelosi estimates the revenue from such a tax to generate between $200 billion to $250 billion over ten years - nowhere near enough to cover the cost of their massive expansion of the welfare state coupled with tax cuts for "local" journalists, along with wealthy homeowners in high-tax states like New York (home of Senate Majority Leader, Charles Schumer), New Jersey, and California (Home of Pelosi). Since Democrats promise that their bill won’t increase the deficit, other tax increases are indeed in the offing. Lots of them.
Details of the coming budget deal are still being finalized, and not all Democrats are quite on board. But there are aspects of the so-called billionaire’s tax that scream for scrutiny. Let’s begin with the observation that it would work just like homeowners’ property taxes. As the value of your home increases, in most locales, so do your property taxes.
Remember the Alternative Minimum Tax and The History of Income Tax Rates
The dreaded AMT has been around in some form since 1969. It ensured that the wealthiest Americans paid income taxes. But in 1990 and again in 1993, it was modified in a way (not truly indexed to inflation) to hit middle-class Americans - 5 million taxpayers by 2017. The Tax Cuts and Jobs Act of 2017 finally quadrupled the phaseout threshold for the AMT from about $120,000 annually to $500,000, and then indexed for inflation. That threshold for 2020 was $518,000, or $1.036 million for married couples filing jointly. The number of Americans impacted dropped to 250,000. Many of us who were affected for years cheered the change.
The same is true of the income tax, as explained by the Wall Street Journal editorial writers: “The first income tax enacted after ratification of the Sixteenth Amendment in 1913 had seven tax brackets with rates from 1% on income over $3,000 ($83,972 in current dollars) to 7% on income exceeding $500,000 ($14 million). You know what rates are now. The alternative minimum tax also applied initially to the richest Americans, but with time expanded to hit millions in the middle class.”
The lesson here today's tax on the wealthy can become a slippery slope to a tax on the rest of us. The “slippery slope” argument isn’t a fallacy if it’s happened before.
That Pesky 16th Amendment
America did not have a federal income tax until the enactment of the 16th Amendment to the Constitution in 1913: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Except that the Democrats’ proposed tax on the unrealized capital gains of billionaires isn’t an income tax or even a wealth tax. It may be unconstitutional. It is an open question. The Wall Street Journal: “…a wealth tax is also probably illegal. The Constitution says Congress can only impose ‘direct taxes’ that are ‘apportioned among the several states’ according to population. While the Sixteenth Amendment authorized Congress to tax incomes, from whatever source derived, without apportionment,’ unrealized capital gains aren't income.”
The Politics
Democrats are trying to find a way to increase taxes in the most politically amenable way. No one is sympathetic (envious, perhaps) of the plights of mega-billionaires like Bill Gates (the nation's leading farmland owner), astronaut Jeff Bezos, Elon Musk, or George Soros. They may have found one that even Republicans won’t fight since so many of these billionaires are significant funders of Democratic candidates and causes.
Some of these billionaires are even “supportive” of this new tax. Remember that the wealthy hire the best tax lawyers and accountants. They help them avoid or minimize taxes with crafty strategies, such as borrowing money at low rates to finance their lifestyles without selling or cashing in their stocks and other assets.
But Americans should be very careful about supporting what amounts to a new national property tax. Will they get a tax break if their investments or businesses lose money? Then what? How will Congress make up for the loss of revenue in such cases? Just borrow more money?
Today’s tax on billionaires may become tomorrow's tax on the value of a farm, a home, or your business. Pay careful attention to the details of whatever language Democrats start floating over the next day or two, including other tax hikes, such as a 3% surtax on incomes over $5 million. And don't expect any courageous stands from Democratic Senators Kyrsten Sinema (AZ) or Joe Manchin (WV).
Someone else’s dominos may fall today. Yours may fall tomorrow.