Taxpayers reaching $100 million in net worth after 2023 would be subject to the proposed minimum tax the first year they reached that wealth plateau.
The proposed minimum tax would subject all unrealized gains of the taxpayer to the new minimum tax in 2023. The Treasury’s estimated tax receipts over the first 10 years of the tax law are estimated to be $360 billion. Most of that amount would be the first-year liability, with payments allowed to be made over nine years (with interest).
If enacted, Biden’s minimum tax would be challenged in court as unconstitutional, as it could be considered a wealth tax and/or a retroactive tax, therefore violating due process. In Congress, it would also be challenged as being arbitrary and capricious.
The “billionaire tax” would violate the Supreme Court’s long-established rulings requiring a recognition event (a sale) for income to be taxed. The “billionaire tax” is a tax on appreciation, not recognition. The only nuance in the Biden proposal is that the appreciation would only be taxed if the taxpayer had a certain net worth. That doesn’t change the nature of the tax.
The calculation of the “billionaire tax” begins with the wealth of the taxpayer. Only taxpayers with wealth in excess of $100 million would be subject to the tax. This is unique. If wealth is any part of the formula, much less the touchstone before there’s a calculation of the tax, the tax should be considered a wealth tax, therefore making it unconstitutional.
Most agree that wealth taxes are direct taxes and are not permitted under the Constitution. Most who disagree and believe a wealth tax is constitutional begin their thesis with a statement that previous Supreme Court cases regarding a wealth tax were decided incorrectly. Given the current Supreme Court and its general application of stare decisis, it would appear that a wealth tax would have a very difficult time finding a favorable Supreme Court decision.
The proposed minimum tax would create extraordinarily different results for taxpayers with identical income and dramatically different wealth. Assume two taxpayers equally own a single business. At the beginning of 2023, taxpayer A has a net worth of $20 million and taxpayer B has a net worth of $96 million. Assuming that neither taxpayer has any realized income in 2023, but there has been a $12 million increase in the value of their business. Under the proposal, taxpayer A would have no minimum tax and taxpayer B would be subject to a minimum tax on any appreciation in his $96 million of net worth at the beginning of the year, plus his share of 2023’s appreciation. This could only be considered a tax on wealth, as the two individuals, sharing the exact amount of appreciation in 2023, would have no income tax.
The calculation of the billionaire tax is essentially a retroactive tax, collecting taxes on appreciation over, in theory, as long as 100 years. The “billionaire tax” would give the Supreme Court the opportunity to conclude that deeply retroactive taxes violate due process. While there has been some degree of retroactivity accepted by the Supreme Court, it has generally been limited to quickly correcting an error in prior tax legislation or within a single year.
The Ninth Circuit is currently reviewing a case where retroactivity goes back 30 years. The retroactivity is viewed by a lower court as “supported by a legislative purpose and furthered by rational means and is therefore not a wholly new tax and not subject to the due process claim.” In the Biden proposal, it’s impossible to see the “billionaire tax” as anything except a new tax.
Basic fairness would argue against Congress waking up on a Monday morning and determining to tax appreciation conceivably on assets held for 100 years. The issue of appreciation of assets to a specific date for any income tax calculations has arisen once before. In 1913, when the first Internal Revenue Code was enacted, Congress faced the question of calculating gain or loss with respect to assets purchased before 1913 and sold after. Congress determined that the cost basis of any asset acquired before 1913 was the higher of cost or fair market value. As a result, gains realized but not recognized before 1913 were never taxed. 1913 would serve as excellent precedent for any new definition of income.
If Warren Buffett still owned the three shares of Cities Service he purchased at age 11 in 1942, the Biden “billionaire tax” would impose a minimum tax on the difference between his purchase price in 1942 and its fair market value at Dec. 31, 2023. This would be a retroactive tax.
While there is the president’s subjective argument that the rich should pay their fair share, one is reminded of Sen. John Sherman’s position in advocating for a flat income tax with a tiny exemption during the debate of the proposed 1894 income tax: “all citizens—not just the rich—would pay their ‘fair share’ of the cost of government.” Sherman, as pointed out by Sheldon B. Pollack in “The Tax Lawyer,” thought targeting the wealthy alone through income taxation was “a low and mean form of socialism.” Considering the recent report that in 2020, 60 percent of U.S. households paid no income tax and 57 percent again in 2021 paid no income taxes, the words of Sherman do seem to resonate 136 years later.
If Congress believes that tax increases for the wealthy are an appropriate answer, Congress can make any number of adjustments to tax rates for income taxes, deductions, and/or estate taxes. Congress can also make certain transactions more difficult to accomplish. Proposing a new tax that would challenge the Constitution and result in years of litigation is a terrible pathway to pursue.
