- Biden has a new plan for taxing billionaires, targeting a loophole that let them shrink tax bills for decades.
- By parking cash in assets like stocks, the rich can grow their net worth without paying
taxes on it.
The data backs him up. The country's richest see much of their wealth go untaxed, leaving them with lower effective tax rates than the majority of Americans.
The Biden administration on Monday proposed a minimum income tax on the country's wealthiest people, setting a 20% minimum rate on households worth $100 million or more. The plan, dubbed the Billionaire Minimum Income Tax, includes income from unrealized gains on assets like stocks and bonds. That's a key difference from the status quo, as America's richest households are currently only taxed on those gains when they sell assets.
The loophole has allowed billionaires to see their wealth balloon through the pandemic with little tax consequence. America's billionaire class added $1.7 trillion to their cumulative wealth throughout the pandemic, the left-leaning Americans for Tax Fairness recently calculated.
It's exactly that kind of wealth that Biden aims to place in the IRS's crosshairs. By parking their cash in assets, billionaires have legally shrunk their tax liabilities for decades. Data from a famous 2019 study on tax equity details exactly how that's left billionaires with lower effective tax rates than most of the US when factoring in unrealized
The average tax rate for the 400 wealthiest US households in 2018 was just 23%, according to the study by University of California Berkeley economists Emmanuel Saez and Gabriel Zucman.
By comparison, the average tax rate for all Americans was 28% in 2018. The rate paid by the 400 richest households wasn't just lower than the nationwide average, it even fell below the rate paid by the lowest 10% of earners, who had an average tax rate of 25.6%. Put simply, the highest earning households paid a smaller share of their income in taxes than America's lowest-paid workers.
That same year also saw a historic convergence between America's working class and richest households. The average tax rate for the 400 wealthiest households dropped dramatically to 23% from 26.9% in 2018, according to the study. Yet the rate for the bottom 50% of earners fell by just 0.7 percentage points to 24.2%.
For the first time going back to at least 1960, the earliest year this data is available, the richest Americans payed a lower effective tax rate than the lower-earning half of the US population.
Wealthy Americans park a much larger share of their wealth in financial assets compared to the average American, meaning they benefit most when markets soar. By focusing on billionaires' capital gains, Biden is targeting the source of the years-long tax disparity that doesn't appear in simple income tax brackets.
"The proposal remedies the single biggest failing of the tax code – that massive accumulations of wealth regularly go untaxed," Seth Hanlon, a senior fellow and tax expert at the left-leaning Center for American Progress, told Insider's Juliana Kaplan and Joseph Zeballos-Roig. "The proposal is carefully designed to ensure that it only affects the wealthiest 0.01 percent of people, and does so in a way that is practical and administrable."
Whether the proposal actually becomes law remains to be seen. Centrist Democrats including Sen. Joe Manchin and Kyrsten Sinema held back some of Biden's proposals during his first year in office, with the latter previously showing some hesitancy toward raising taxes on billionaires.
Yet those same lawmakers have called on the administration to shrink the federal deficit, and the tax plan is estimated to bring in $360 billion over a decade.