Biden’s Latest Tax Folly

National Review Online

Tuesday, March 29, 2022

 

Faced with real economic pain, President Biden proposes to tax imaginary income.

 

Biden has had some very, very stupid ideas in his 50 years in public life. We won’t say that his latest “billionaire” tax proposal is the dumbest of them, but it’s on the top-ten list.

 

Biden’s proposed “Billionaire Minimum Income Tax” — which, of course, is not actually limited to billionaires — is an economically illiterate and very likely unconstitutional proposal that purports to make the very wealthy pay their “fair share,” in the conventional language of Democratic demagoguery. It would do so in part by taxing some high-income people on money they haven’t made yet, combining the worst features of the IRS with the worst features of Minority Report.

 

There are a few obvious problems with Biden’s latest folly. The first and most obvious is that the wealthy already pay a lot more than their proportionate share of federal income tax: According to IRS figures, the top 10 percent of households by income already pay more than 70 percent of all federal income taxes, though they collectively earn less than half of all income. The top 1 percent make about 20 percent of all income but pay 40 percent of the federal income tax — their income-tax burden is twice their share of income.

 

The dishonest rhetoric about millionaires and billionaires paying a lower tax rate than middle-class Americans intentionally conflates different kinds of income. The very wealthy pay a higher income-tax rate on their salaries than do those with lower incomes, and they pay the same tax rate on investment income as lower-earning workers do. The difference is that very high income earners usually make more of their money from investments than they do from salaries. You don’t become a billionaire by having a salary of $200 million a year and putting most of it in the bank — fortunes in the billions are usually associated with starting a new business, which is why the wealthiest Americans are almost to a man attached to corporate names you know. In order, those are: Tesla, Amazon, Microsoft, Oracle, Facebook, Google, Berkshire Hathaway, Bloomberg, Walmart, Nike, and the very lucrative business of getting divorced from Jeff Bezos.

 

Capital and entrepreneurship go where they are valued: There is a reason Elon Musk emigrated from South Africa to Canada to California to Texas.

 

The United States, like many other countries, taxes investment income differently from how we tax salary income. Part of that is to offset the fact that dividends are paid out of income that already has been taxed once at the corporate-income level, and part of it is because we want to encourage entrepreneurship and risk-taking. It is one way to entice innovative and energetic people to initially work for nothing — or lose money — starting new businesses rather than taking comfortable six-, seven-, or eight-figure jobs at established companies or working on Wall Street. The United States is better off being home to Apple and Tesla than it would have been if the people who started those companies had become investment bankers or real-estate developers.

 

It is far from a perfect system, but it is a pretty good one. (Quick, what’s the most successful Internet start-up from Germany?) The wealth and income created through that kind of investment is an important driver of U.S. prosperity — not only for the billionaire founders of companies but also for their employees, customers, and business partners.

 

You may have heard the rumor that sometimes stock prices go down as well as up. If you buy a share at $1 and it goes up to $2, then you’ve made $1 — if you sell the share and collect the gain. But that $1 share bought on Monday that goes to $2 on Tuesday may very well be $1.40 on Wednesday and $0.65 on Friday. The Biden proposal would tax “unrealized gains” assessed at an arbitrary point — irrespective of whether the investment actually makes that much money, or any money at all, or loses money. So-called mark-to-market rules are a useful tool in some contexts, such as assessing the financial health of a bank for deposit-insurance purposes, but mark-to-market is a capricious and destructive way to calculate an individual’s income tax. It is capricious and destructive when it is the county tax-assessor giving your house a notional market value for tax purposes — imagine the federal government trying to do that for something as fluid and complex as whatever it is that Andreessen Horowitz is up to this week.

 

The proposal is economically absurd, and probably illegal. The 16th Amendment empowers Congress to “lay and collect taxes on incomes, from whatever source derived,” but unrealized investment gains are not income — they are, at best, potential income. Investments are also potential losses. That’s how investment works.

 

If the Democrats want a Scandinavian-style welfare state, then let them propose Scandinavian-style taxes, too. What’s different about the United States compared to the European welfare states admired by our progressives is not taxes on the very wealthy but taxes on those in the middle and upper-middle. In the United States, a married couple earning $110,000 a year (1.5 times the median household income) would pay a top marginal rate of 22 percent; in Sweden, the equivalent couple (earning 1.5 times the median income) would pay 57.2 percent, a little more than two and a half times as much.

 

If you don’t like that idea, there are alternatives: fixing our entitlement system, making some necessary reforms to the tax code, and — let’s not forget this one — not spending money like idiots. What’s needed in Washington is genuine fiscal reform and fiscal discipline, not sophomoric demagoguery, gimmicks, and stunts.

 

The so-called billionaires’ tax deserves to be laughed out of Congress. Let’s hope it is.