Biden proposes new tax surcharges of 5%-8% on millionaires

Update: Pres. Joe Biden and Democrats in the House of Representatives on Thursday changed their tax plan yet again, proposing a new surcharge of 5% on individuals earning more than $10 million a year.

That's more than the 3% that Senate Democrats floated barely one day earlier and comes after House Democrats proposed on Tuesday to tax the paper profits of billionaires. The billionaires proposal died a quick death amid a lack of needed support from lawmakers in both the Senate and the House.

The latest plan would also levy an additional 3% surcharge on those making more than $25 million. Those wealthy taxpayers would thus pay an additional 8% on top of the top ordinary rate, now 37%.

Neither the House document nor a fact sheet from the White House made any mention of raising the top ordinary rate, now 37%, to 39.6%, as Biden and Democrats had previously called for. Nor did the documents mention the administration's and lawmakers' prior call to raise the top capital gains tax to 28.3% from the current 23.8%.

The new proposal would also close the “Medicare Self-Employment Tax Loophole” by “strengthening” the 3.8% net investment income tax for people making more than $400,000.

Bloomberg News reported Thursday that unspecified changes to the $10,000 cap on state and local tax deductions, including for property taxes, would likely be in the final package.

Biden is seeking ways to pay for his dialed-back social spending and climate bill, now costing $1.75 trillion instead of the original $3.5 trillion.

Prior update: The 'Billionaires Tax' proposal was on life support late Wednesday as a top lawmaker said that it didn't have enough support to become the law.

Bloomberg News quoted Richard Neal, who oversees the House's tax-writing Ways and Means Committee, as saying that the chamber was now discussing with the Senate a new 3% surtax, on top of the highest ordinary income rate, for those earning more than $10 million. But the top Senate official who introduced the billionaires proposal insisted late Wednesday that it wasn't dead yet.

Here's the original proposal late Tuesday to tax billionaires on their investment profits held on paper.

The “Billionaires Income Tax” would start in 2022 and affect wealth planning by around 700 of the very richest Americans, including Amazon.com founder Jeff Bezos, Tesla founder and CEO Elon Musk and Facebook co-founder and CEO Mark Zuckerberg. The call comes as Democrats scramble to find ways to pay for trillions of dollars in spending amid setbacks to their original tax increase proposal.

If the proposal to tax unrealized gains passes Congress, it’s certain to face legal challenges. Brent Lipschultz, a partner in the personal wealth advisors group at accounting and advisory firm EisnerAmper in New York, said that he didn’t worry that the income thresholds would be lowered. “I don’t see this creeping down to millionaires or the mass affluent,” he said. 

Here’s what you need to know from the proposal summary:

• Taxpayers with more than $100 million in annual income or more than $1 billion in assets, either over three consecutive years, would be required to pay annual taxes on their stock and bond profits, even if they’re only on paper.
• Both individuals and trusts that pay taxes would be affected.
• Paying capital gains tax on profits regardless of whether or not they’re the result of a sale is known as “mark-to-market.” Under current rules, taxpayers owe tax only when they sell their investments.
• Billionaires can pay the initial taxes over five years. In years after the first tax is due, they would pay tax on their subsequent gains.
• The one-time tax alone would raise $275 billion from the top 10 richest Americans.
• The current top capital gains rate is 23.8%; House Democrats want to raise it to 28.8%, but it’s unclear if that will happen as Democrats in both chambers fight over tax increases to pay for the Biden Administration’s trillion-dollar spending plans.
• Capital losses could be carried back for up to three years “in certain circumstances.” 

Bloomberg News

• Nontradable, hard-to-value assets like real estate, a partnership interest or a business would bear a new, one-time interest surcharge when sold. Billionaires would pay their usual tax, plus a new “deferral recapture amount” that’s equal to the interest on the tax that was deferred while the individual held the asset. 
• The interest rate for the “deferral recapture amount” would be the  short-term federal rate (currently 0.18%) plus one percentage point. For non-publicly traded assets, the total tax owed, including the interest surcharge, would be capped at 49%.
• Interest would not be tallied for assets sold before the proposal goes into effect or in the first tax year that a taxpayer is subject to the Billionaires Income Tax, whichever is later.
• Billionaires would be able to exclude up to $1 billion of tradable stock in a single corporation from being taxed before sold. The exclusion is designed to ensure that the proposal “does not affect the ability of an individual who founds a successful company to maintain their controlling interest.”
• Billionaires would fall out of the three-year rule for $1 billion in assets or $100 million in income only if their assets or income shrink below half of those thresholds for three back-to-back years.
  
  

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• There’s debate over whether the taxes would pass muster under the US Constitution, which in general bans a “wealth tax” but not, of course, income taxes.
• Robert Willens, a tax and accounting expert in New York, said that if taxes are paid on paper profits that subsequently shrink in later years, the taxpayer could claim a deduction or loss for the decline in value. “There's no way they could tax unrealized appreciation in one's assets, yet deny a deduction or loss for subsequent depreciation in the value of the assets,” he said.
• Willens said the proposal comes from Sen. Ron Wyden, an Oregon Democrat, and Sen. Elizabeth Warren, a Massachusetts Democrat. “They are clearly the most vocal proponents of what will almost certainly be ruled to be an unconstitutional "wealth" (as opposed to "income") tax,” Willens said.