More generally, many Democrats say the current tax system is unfair. Income tax does not apply to assets appreciated until they are sold. And when people die, that unrealized gain is not affected by income tax, although inheritance tax may apply. As a result, according to Democrats, the rich can see their wealth increase dramatically – and borrow against their assets to finance their way of life – while paying relatively little tax.

Here’s how the upcoming proposal might work.

What is the basic idea of ​​taxing billionaires?

Some Democrats in Congress want to tax billionaires every year on their unrealized capital gains. In other words, they would broaden the definition of income to include increases in the value of assets, but they would only apply this new rule to people at the top of the American wealth distribution.

Tax would be calculated on the difference between the value of an asset at the start of the year and at the end of the year.

For example, someone who owned $ 2 billion in stocks on January 1 and saw them grow to $ 2.5 billion on Dec. 31, would be liable for capital gains taxes on the $ 500 million gain, even though they did not sell any of the shares. The current maximum tax rate on capital gains is 23.8%, plus state taxes.

Who should pay?

The plan is expected to include Americans with a net worth of at least $ 1 billion or income of at least $ 100 million for three consecutive years. That’s probably less than 1,000 taxpayers, according to Forbes magazine’s estimate of the number of US billionaires.

How much money would that bring in?

House Speaker Nancy Pelosi (D., Calif.) Recently said that it would generate between 200 and 250 billion dollars over a decade. There is no official estimate yet from the Congressional Joint Committee on Taxation.

Does he have enough support to go through Congress?

We do not know. Some Democrats, including House Ways and Means President Richard Neal (D., Mass.), Have raised questions about supporting a rapidly evolving idea. it was not put through a full congressional committee process. More details on the plan are expected shortly.

How would these taxpayers move from the current system to the new one?

A plan presented by Senator Ron Wyden (D., Ore.), described in a 2019 white paper, would create a single tax on unrealized gains to date. So someone who started a business and is now worth $ 50 billion could owe taxes on all of that gain, even before annual taxes apply to future appreciation of the asset. Democrats are expected to allow this payment over several years and could offer a reduced rate to avoid disruption to the market for founders of companies selling their shares to pay the tax.

Is it a wealth tax?

No. A wealth tax, as proposed by Senators Elizabeth Warren (D., Mass.) And Bernie Sanders (I., Vt.) Would apply to all assets. The tax presented by Mr. Wyden relates only to unrealized gains. So a billionaire whose net worth is unchanged from the previous year would not pay the new tax proposed under the Wyden Plan, but would pay under the Warren Plan.

What do the very rich think of this idea? Are the Republicans on board?

Potential taxpayers are starting to criticize the idea. Elon Musk, the richest person in the world, reacted approvingly to criticism of the Wyden plan as a potential step towards a much larger tax. “Eventually they don’t have any more money for the others and then they come looking for you,” he said. wrote on Twitter late Monday.

Republicans also did not support the idea and oppose Mr. Biden’s broader spending proposal in its entirety.

What if the value of assets goes down? Would the government send rebate checks to billionaires?

There will be years in which a given billionaire will lose money as asset values ​​decline, and the prospect of the government sending tax refund checks to billionaires is politically unappealing.

The plan is likely to allow affected taxpayers to carry losses forward and possibly back to deduct them from the gains. The exact details are not yet defined, but, for example, someone who lost $ 2 billion in paper in one year could protect the first $ 2 billion in paper earnings from taxes the following year.

How would the regime tax hard-to-value assets, like a private company or a Picasso painting?

Not everything that belongs to the rich is stock that can be sold to pay tax. They also own private businesses, artwork, and other assets that may be more difficult to value. The Internal Revenue Service is used to making these assessments during estate tax audits, but such cases often lead to disputes and court cases filled with expert witnesses.

There are ways to resolve these issues. One possibility is a rule that adds annual interest charges to earning those assets. In such a system, people would not have to pay annual taxes on illiquid assets. They are expected to increase the amount of taxes over time in a way that does not provide an advantage for deferring tax payment into the future. Without such a system, taxpayers would have an opportunity for arbitrage due to the incentive to own certain types of assets. . This is something that policymakers often try to prevent.

What if you are no longer a billionaire? Or if you become one?

The plan will need to include details of what happens when a person moves from the regular tax system to this separate tax system and back again.

Can the IRS enforce this?

The IRS, shrunk after a decade of stable or shrinking budgets, has struggled to enforce existing tax laws. Affected taxpayers are among the most sophisticated tax planners and have access to the best advisers. They may be willing to spend millions on a variety of strategies – using charitable donations, trusts, and complex ownership structures – to save billions in taxes.

This represents a challenge for the agency.

Another part of the Democratic plan calls for a 10-year, $ 80 billion expansion of the IRS that would roughly double its size and allow it to focus more on auditing top earners.

Is it constitutional?

There are open questions as to whether this tax proposal is an income tax allowed under the 16th Amendment. This amendment says that Congress can tax income without it being considered a direct tax that should be allocated among states based on their share of the population. If enacted, the tax is liable to be challenged on these grounds.

Write to Richard Rubin at [email protected]