Biden's billionaire tax would work a lot like the withholding you see on your paycheck

• On Monday, President Joe Biden introduced a billionaires' tax in his 2023 budget proposal.
• The proposal puts a 20% minimum income tax on billionaires, and "income" includes the growing value of assets.

President Joe Biden has laid out his budget priorities for 2023 — and one of them is taxing billionaires.

On Monday, Biden introduced what he's calling the Billionaire Minimum Income Tax, which would impose a minimum 20% tax on Americans worth over $100 million.

A key part of that tax is how it defines "income." Under Biden's proposal, the growing value of things like stocks and real estate — which are called unrealized capital gains — would be considered a part of someone's income, and subject to tax.

And that's where the debate gets heated.

Currently, capital gains are taxed only when they're sold and the seller receives cash for the value. America's wealthiest derive most of their wealth from the growing value of their assets, rather than a paycheck. The Biden administration argues it should be taxed as income, while critics argue it's not a form of income and therefore not taxable under the 16th Amendment.

The proposal already seems imperiled, with key centrist Democrat Sen. Joe Manchin telling Bloomberg that the ultra-wealthy shouldn't be taxed on "things you don't have."

Manchin's comments get at the heart of what could be an issue for the tax: Its definition of income. But proponents say it would function more like the taxes that get withheld on your paycheck — a prepayment on future income. However, it could get into legally dubious territory — or, at the very least, might kick off legal challenges that could keep it tied up in court for years.

It would work like getting taxes withheld on your paycheck

The thought of taxing the growing — but not yet realized — value of something as income may seem hard to wrap your head around.

But David Gamage, a law professor at Indiana University, told Insider that "this actually isn't a tax on unrealized gains — it's a prepayment mechanism for capital gains."

Gamage said it's akin to something many Americans are probably familiar with: Withholding taxes on your paycheck. By withholding from each check, you essentially pre-pay taxes so you're not stuck with one big bill on tax day each year.

For instance, when you file your income taxes in April, you may find that you actually paid too much money — and then you get some back. That's the tax refund that millions of Americans are very familiar with. It's the "same thing" with this proposed tax, per Gamage, who said he's been working with the administration on this provision for some time.

"If you pay the minimum tax based on your stock going massively up in value before you sell it, but then, five years later, the stock market collapses and you sell your stock for a loss, then you get all of that back — because you didn't actually have that income," Gamage said. "You just prepaid based on an estimate of the income that you would ultimately have."

So, when the assets do get sold, the prepayment would go towards the long-term capital gains tax they would normally accrue.

There is one big difference between annual withholding and this tax: "You could be prepaying your tax for 20 or 30 years," Beverly Moran, a professor at Vanderbilt University, told Insider.

"Even if it wasn't challenged," Moran added, "it's set up to take too long to be implemented."

But some say it's constitutionally dubious, or could at least invite lawsuits

Critics of an outright wealth tax, when people are taxed based on their total net worth, question whether the Constitution would let that fly.

But Biden's proposal isn't a wealth tax because he's only proposing to tax what he considers income.

"What's a problem with the proposal out of the White House is they are trying to transform something that has never been income into income, in order that they can claim these revenues under an exception made in the 16th Amendment," Kent Lassman, the president and CEO of Competitive Enterprise Institute, a right-leaning think tank, told Insider.

The 16th Amendment gave Congress the power to tax incomes. Lassman said that the Constitution is designed with protections for citizens, and that "the heart of problem" is "that we're trying to go around the taxpayer protections, because otherwise it would be very difficult to administer a wealth tax."

"Nothing like this has quite been done before, and whenever you do something that's somewhat new, there's some uncertainty about what the Supreme Court might say," Gamage said. "But that uncertainty doesn't make it unconstitutional. It just matters about how Congress might have to revise this in order to make it work."

Moran, who has written on why an outright wealth tax is unconstitutional, thinks that Biden's proposal will "buy a lawsuit" — but it might not have the same fate as one over a wealth tax.

"It is going to be a fight, but it's a fight that the Biden administration could win," she said.

But, even so, Moran said it "doesn't seem like the best use of resources," since the law will take so long to kick in — the first payments will be stretched over nine years. It seems "clunky," she said, when preexisting taxes like the gift and estate tax could be worked with instead.

"Once you understand the ways the current system is broken, we can argue about what the best fix is," Gamage said. "I think this would be a very good fix, but reasonable people can differ on what they think the best fix is."