The U.S. Senate is considering a “wealth tax” to fund Biden’s spending proposal

Parliamentary Democrats are arguing over how much of US President Joe Biden’s social and environmental spending package will be enacted, and disagreements over other proposals to raise tax revenues have made party members novel and highly We are proposing a controversial “wealth tax”.

Advocated by Oregon Democrat Ron Wyden, chairman of the Senate Finance Committee, the tax will pay about 700 of the country’s wealthiest people about the unrealized gains on their assets. Will force you. For example, Amazon founder Jeff Bezos has to pay taxes on the increase in the value of the shares held by the company, even if he has never sold it.

File-Senator Ron Weiden of the Senate Finance Committee held a hearing at Capitol Hill, Washington on June 30, 2020.

Taxes are also applied retroactively. If Bezos passes, Bezos is obliged to pay huge taxes on the total growth of his Amazon-based wealth dating back to the establishment of the company in 1994. This proposal allows you to pay cumulative tax for 5 years. From now on, Bezos’ portfolio will be valued annually and its value increase or decrease will be the basis of the annual tax bill.

Proponents of the idea praise the plan to force the ultra-rich to pay a “fair distribution” of taxes, but critics say the plan is difficult to implement and may even be illegal. ..

Wealth taxes are generally rare, and only a handful of countries in the Organization for Economic Co-operation and Development (OECD) collect them, primarily in Europe. Weiden’s plan is now in the spotlight as other Democrats have overthrown more traditional ways of making money.

The Biden administration initially wanted to raise taxes on the wealthy by ending the practice of allowing investments to be passed on to the deceased heirs without tax. When parliamentary Democrats opposed it, party leaders proposed a slate to raise the tax rate. However, Arizona Senator Kyrsten Sinema said he would not vote to raise the tax rate, ruining the proposal and urging Weiden to put his plans on the table.

Big challenges remain

File-Senator Joe Manchin, DW.Va. Talks to reporters at the Capitol Building in Washington, October 5, 2021.

File-Senator Joe Manchin, DW.Va. Talks to reporters at the Capitol Building in Washington, October 5, 2021.

As of Wednesday morning, some Democrats, including West Virginia Senator Joe Manchin, were concerned about the plan. Manchin said he was worried that “targeting” certain high-tax individuals could be “divided.” Given that Republicans are expected to unanimously vote against the bill, 100 Senates and Vice President Kamala Harris have only 50 votes available to break the tie, and Democrats are members. I can’t afford to lose even one of them.

Some experts warn that Democrats could run into problems as they try to impose this new tax towards the end of the bill negotiations.

“This was picked up quite late,” said Garrett Watson, senior policy analyst at the Tax Foundation, a Washington think tank. “They are trying to develop details, including a draft legislative text we obtained this morning, to determine how this is managed.”

He said the details would be “tricky”. “Given the concerns about how this affects the market, its complexity, the fact that it targets a very small group of individuals … I think it’s still going a pretty difficult path. increase.”

Constitutional question

One of the legal challenges that the proposal will almost certainly face is whether unrealized profits are counted as “income” under the Sixteenth Amendment to the Constitution, which legalized federal income tax.

If the unrealized profit does not meet the definition of income, the tax will not work. This is because if the federal government imposes taxes other than income tax, it must “allocate” the burden so that each state contributes in proportion to its share of the population.

Tax control is virtually impossible because millionaires are not evenly distributed across the country.

Measurement problem

Even those who broadly agree to require the ultra-rich to pay taxes on unrealized profits are uncertain whether Weiden’s proposal will work.

“It’s a good idea to find a way to tax these return on investment,” said Howard Gleckman, a senior researcher at the Washington Center for Tax Policy. But he added, “I don’t know if the proposals currently in circulation in Congress are the best way to do that.”

The main problem is that not all wealth growth is as easy to measure as a public company equity portfolio. Much of America’s wealthiest wealth is tied to privately held companies that are difficult to assess and illiquid assets such as art collections, real estate and yachts.

Weiden’s proposal recognizes it and waits for those assets to be sold and taxed. This adds an additional fee, which means the approximate number of years of tax payment, to the capital gains tax paid on the valuation of the asset.

“More complicated”

“Now you have two separate systems for taxing very wealthy people, and that will create a lot of additional complexity,” Gleckman said. “This solution takes what was already planned to be a very complex addition to tax law and makes it even more complicated.”

And the more complex the system, the more loopholes a wealthy American tax accountant can exploit.

“When you impose such taxes on millionaires, you are trying to tax those who have unlimited resources to hire the smartest tax lawyers on the planet, and how they avoid taxes. You will find, “Grecman said. “Parliament tries to predict all the tricks people use, but inevitably misses some.”

Rarely imposed

Within the OECD, only five countries impose what organizations call “ordinary taxes on net worth.” They are Colombia, France, Norway, Switzerland and Spain.

By 1990, some wealth tax had been levied on 12 OECD countries, but over the years most of these programs were abandoned.

“Wealth taxes have declined fairly sharply over the last 20 to 30 years, especially in Europe and the OECD, because they aren’t working very well,” said Watson of the Tax Foundation. rice field. “The reason is the type of problem we are currently facing related to valuation and liquidity. It makes more sense to do it when (profit) is realized. And this proposal is also listed. assets.”

According to OECD reports, “decisions to abolish net worth taxes are often justified by efficiency and management concerns and the observation that net worth taxes often fail to meet redistribution targets. The income collected from was also very low, with some exceptions. ”

“Buy, borrow, die” workaround

Weiden’s proposal seeks to correct a serious gap in US tax law that allows very wealthy Americans to pass huge wealth to the generation of heirs without paying large taxes.

The current US federal system makes it easy for ultra-high net worth individuals to avoid paying taxes on their assets, especially if they are held in investment. This is because the only taxable event is the sale of assets. Importantly, when a wealthy investor dies, the property is transferred to the heir at its present value. That is, you are not taxed on profits that may have accumulated over years or decades.

This has the very wealthy consequences of tax professionals using the “buy, borrow, die” method of funding their lifestyle. Instead of selling your assets and getting cash, you make a lot of loans from your bank. Banks offer loans at low interest rates because the borrower pledges their investment holdings as collateral.

As long as their investment portfolio earns higher returns than the interest rates claimed by banks, they can continue to grow their wealth, even when they are spending. When they die, their property repays unpaid loans from cumulative profits and is greater than would have been available if the underlying assets were sold to fund spending during the life of a wealthy individual. Leave the inheritance to the heir.

The U.S. Senate is considering a “wealth tax” to fund Biden’s spending proposal

Source link The U.S. Senate is considering a “wealth tax” to fund Biden’s spending proposal

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