Caroline Brehman/CQ Roll Call via AP Images
Sen. Ron Wyden (D-OR) talks with reporters as he makes his way to the Senate floor for a vote, July 13, 2021.
The concept of the deus ex machina dates back to ancient Greek theater, as a means to resolve unresolvable plot points. An actor playing a god would emerge from a machine, magically fix the problem, and deliver a happy ending. We’ve seen these last-minute saves in entertainment for the succeeding 2,500 years, from War of the Worlds (where the aliens conquering the planet suddenly die from a bacterial infection) to Dallas (where an entire season was resolved as a bad dream conjured in the head of Bobby Ewing).
But rarely do you get a deus tax machina, a last-minute rollout of a novel way to raise revenue to settle a political standoff. Things looked bleak in our story after Sen. Kyrsten Sinema (D-AZ) decided to oppose increasing any tax rates on individuals, corporations, or capital gains, the primary ways to raise revenue through the tax code, in the Build Back Better Act. Combined with a significant rollback in budget savings through Medicare price negotiation for prescription drugs, and with President Biden saying for months that all spending in the bill would be offset, it didn’t seem like whatever was left could support even a smaller spending package.
Enter Sen. Ron Wyden (D-OR), chair of the Senate Finance Committee, with the deus tax machina. His plan replaces the rate hikes with a handful of other measures: taxing billionaires on their unrealized capital income, instituting a minimum tax on the profits large corporations tout to their shareholders, taxing companies that buy back their own stock, and applying the 3.8 percent net investment tax from the Affordable Care Act to partnerships and S corporations.
So a series of taxes on the rich are on the verge of being replaced with much more aggressive taxes on the ultra-rich. And experts in tax law say it’s both a legal and enforceable way to amass enough revenue to cover the close to $2 trillion in spending in Build Back Better, as well as make a more considerable dent in runaway wealth inequality than the previous framework.
A series of taxes on the rich are on the verge of being replaced with much more aggressive taxes on the ultra-rich.
Because they’ve risen in prominence late in the process, these measures are being described as being hastily written at the last minute. But the god-machine had spent years being assembled. In the spring of 2019, Wyden asked his staff to work on proposals to target extreme wealth not captured by ordinary income tax levies. According to David Gamage, a tax law professor at Indiana University who has worked with Congress on tax proposals, around three-quarters of economic income will never be reported to the IRS under current law. The only way to get at wealth inequality in the U.S. is to deal with capital income.
Most of this money comes from having money, held in income-generating assets like stocks and other securities, debt contracts, and real estate. If a billionaire never sells these assets, and instead borrows against them until they die, they can get through life without they or their heirs ever paying a penny in tax on them.
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Wyden’s team specifically homed in on reversing this dynamic of “buy, borrow, die.” The senator presented a white paper late in 2019 at the Center for American Progress, with several tax experts like Lily Batchelder and David Kamin who are now serving in the Biden administration. For two years, Wyden’s staff has been converting the concept into legislative language, first at a threshold of $1 million in income, and now at the current level of $1 billion in assets, or a consistent $100 million in income for three straight years. A Senate Finance Committee aide explained that aiming this at billionaires was what made the idea politically viable.
“In a package that’s supposed to be about giving everybody a shot to get ahead, it would be a big mistake, from both a policy and political perspective, not to ask billionaires to pay a fair share,” said Wyden in a statement.
For tradable assets like securities, those eligible would pay a “mark to market” capital gains tax of 23.8 percent on all increases in value within a calendar year regardless of whether they sell the asset, or get a deduction for an on-paper loss (which would probably only be eligible to use to offset future gains). There’s also a one-time tax on “built-in gain” at the time of enactment, based on fair market value of any tradable assets in a billionaire’s portfolio.
Sen. Wyden has said that this combination would yield “hundreds of billions” of dollars over a decade.
For nontradable assets like real estate or valuables or a business interest, taxes on capital gains would only trigger when a sale is made, just like today. But an added “deferral recapture amount” would be assessed, equal to the interest on what would have been owed in unrealized capital gains tax throughout the period that the asset was held. Wyden has said that this combination would yield “hundreds of billions” of dollars over a decade; the best estimates are somewhere between $200 billion and $500 billion. The Joint Committee on Taxation has not yet provided a score.
Because the tax would come later for nontradable assets, there’s some concern that the ultra-rich would shift their asset mix to delay payment. But the Senate Finance aide dismissed that, saying that someone like an Elon Musk or a Jeff Bezos would not sell all the stock in their own companies and buy a bunch of diamonds to evade taxes. (As a political matter, seeing Mitt Romney road-test this argument instantly demonstrates how ridiculous it sounds. You cannot tax billionaires because they will hoard diamonds?)
Other rules would be put in place to prevent avoidance, cracking down on gifts and trusts, for example. There’s the question of how a gutted IRS would enforce this, although $80 billion is made available in the Build Back Better Act for tax enforcement, to handle things just like this.
While Gamage, the tax law professor, said no tax works 100 percent perfectly, the billionaire’s tax at least attempts to prevent gaming and make the tax owed on tradable and nontradable assets equivalent. “The Billionaires Income Tax is about fairness and showing the American people taxes aren’t mandatory for them and optional for the wealthiest people in the country,” Wyden said.
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As for the minimum corporate tax, this would fall on a (as-yet undefined) subset of large corporations, and would be based on the so-called “book profits” that public companies show to shareholders. Biden’s original proposal here called for a 15 percent minimum tax on companies with earnings over $2 billion annually, though Wyden has not released either the tax rate or the threshold level.
Wyden and Sen. Sherrod Brown (D-OH) released their plan in September to tax stock buybacks and levy partnerships with the net investment tax. The buyback tax would equal 2 percent of the money spent by the corporation buying back stock, which critics say distorts markets and boosts CEO compensation. The partnership rules, expanded in Donald Trump’s Tax Cuts and Jobs Act, have largely become tax avoidance vehicles, and adding taxes to them would recoup some of that.
Will the courts agree that this is allowable? This gets very complicated. Taxes on unrealized gains and even “mark to market” taxes exist in America today. If the Supreme Court threw out the Wyden tax, it would also have to throw out large chunks of the tax code. And as Gamage notes, even if the Court made a narrow argument that only this tax was unconstitutional, all that would mean is that the tax would have to be apportioned to states with an equal share according to population. With a social-spending bill like this, you could actually do that without too much trouble, as long as you instituted fallback measures to equalize apportionment through a residual tax. You could do that through a future reconciliation or even append that to this bill.
The measures signify the extremes of liberal tax-fairness messaging. At the individual level, they focus solely on the 1,000 or so households with over a billion dollars in assets as the new definition of the wealthy ($999 million doesn’t cut it). For corporations, they employ the talking point about large companies paying no taxes rather than getting all corporations to pay a fairer share. And buybacks, which could be eliminated by rule at the Securities and Exchange Commission, are instead kept around as a source of federal revenue.
But this inverts what presumably was Sinema’s intent—with her approval, by the way, as she’s been reputed to be working with Sen. Elizabeth Warren (D-MA) on these matters—of shielding the wealthy and corporations from paying up. Yes, many of them will be shielded, and if the state and local tax deduction cap is repealed for two years as has been rumored, some will even see a tax cut.
But whatever got Sinema and Sen. Joe Manchin (D-WV) to agree to these measures, they’ve now committed to attack the insanity of skyrocketing inequality at the very top that has persisted for decades, going precisely where the money is. If Congress goes along—and amazingly, the two loudest holdouts are doing so as we speak—it would be an approach to taxation that we haven’t seen in America in a long, long time.
