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Biden’s plan to tax the rich, explained

The new proposed budget would have billionaires and multi-millionaires footing the bill in an attempt to reduce the federal deficit.

Biden speaks at the State of the Union.
“We have to reward work, not just wealth,” President Biden announced at the State of the Union in February, as he called for a new minimum tax on billionaires.
Andrew Caballero-ReynoldsAFP via Getty Images
Whizy Kim is a reporter covering how the world's wealthiest people wield influence, including the policies and cultural norms they help forge. Before joining Vox, she was a senior writer at Refinery29.

Billionaires in the US pay a tiny proportion of the wealth they accrue in taxes compared to the cut ordinary Americans pay from their wages.

Now, President Joe Biden wants that to change: His just-unveiled budget for fiscal year 2024 contains a tapestry of tax hikes with a laser-beam focus on billionaires, multi-millionaires, and large corporations, all aiming to reduce the federal deficit by $3 trillion over the next decade on the dime of the wealthiest Americans.

The idea of making billionaires pay higher taxes has been gaining momentum — and causing controversy — for years now. Its most well-known champion is Sen. Elizabeth Warren, who proposed a wealth tax in 2019 on households with a net worth north of $50 million, citing an analysis that the richest 0.1 percent of Americans would likely pay just 3.2 percent of their wealth in taxes that year, while others would pay 7.2 percent.

Despite the protests of some billionaires, this longstanding progressive agenda item is becoming increasingly mainstream. Wealth inequality in the US has risen sharply in the past few decades, and the share of Americans holding an unfavorable view of billionaires has grown in the past few years. In a 2021 analysis, ProPublica calculated that between 2014 to 2018, the 25 richest Americans — a list including Elon Musk, Warren Buffett, and Jeff Bezos — paid a true tax rate of 3.4 percent on their income. The ultra-rich can do this because most of their wealth stems from holding assets, not from wage income — and they use an array of obscure tax loopholes and accounting moves to receive a lower tax rate on their assets than they otherwise would. According to the tax records ProPublica obtained, Musk paid zero federal income tax in 2018. Former President Donald Trump paid no federal income tax in 2020 because he reported so many business losses that year.

That’s perhaps why Biden has adopted an agenda of making billionaires pay their “fair share.” The president’s recent attention on taxing the wealthy is a stark contrast from what he infamously told a room of wealthy donors during his presidential campaign in 2019 — that nothing would fundamentally change for them.

Since assuming office, however, Biden has professed a desire to change quite a lot for the ultra-rich in an effort to rein in wealth inequality and raise revenue for important government programs such as Social Security. Biden’s budget plan last year contained many similar ideas as this year’s, including a 20 percent tax on households with over $100 million. (That proposal, the Billionaire Minimum Income Tax Act, was introduced in the House but hasn’t been voted on.) In his State of the Union address in February, Biden boasted that he’d passed a 15 percent minimum tax on large corporations as part of the Inflation Reduction Act. “But let’s finish the job. There’s more to do,” he said. “We have to reward work, not just wealth,” he announced, as he called for a new minimum tax on the ultra-rich.

The specifics of that billionaire tax were revealed in this budget: a 25 percent tax on all wealth over $100 million, estimated to apply to just 0.01 percent of Americans.

With a Congress that’s no longer controlled by Democrats, much of the budget, including substantial tax hikes for the wealthy, isn’t likely to pass. And it’s not so simple to get billionaires to actually pay significantly higher taxes: There’s a well-oiled industry of wealth managers and tax experts whose jobs are to come up with inventive new ways to reduce their clients’ tax liabilities, whether it’s by funneling money into ostensibly philanthropic donor-advised funds or selling off stocks in order to report huge investment losses, which reduces the taxes someone owes. But Biden’s new rhetoric around wealth inequality signals that the administration is betting on taxing the rich to be a politically winning message.

What would change for the rich?

It’s important to note that Biden’s proposed budget includes no tax increases on anyone making under $400,000. Those making more than $400,000 a year would see their top tax rate on their income tax go up, from 37 percent to 39.6 percent — effectively, a repeal of the rate cut included in Trump’s 2017 Tax Cuts and Jobs Act, which cut taxes for the richest Americans most.

The rest of the proposed changes focus on extremely high earners, and attempt a philosophical shift on what kinds of money should be taxed at which amounts. The fact is, money earned through owning and investing capital is taxed at a much lower rate than the money many people earn by working a job and getting paid a wage. A billionaire’s wealth often doesn’t come from a paycheck, but from amassing assets such as companies, real estate, and stocks. Capital gains are only taxed when an asset is sold — and the current top capital gains tax rate is 20 percent. Compare that to the current top tax rate of 37 percent on income earned through labor.

“Right now, in the game of their money versus your sweat, their money is winning,” said Erica Payne, a progressive strategist and founder of Patriotic Millionaires, an advocacy group calling for higher taxes on the ultra-rich. “Every single working person’s dollar is worth less than every single dollar that a Wall Street investor makes. Mathematically, the country can’t do anything other than become more unequal.”

Biden’s budget proposes taxing capital gains at about the same rate as income for those who earn over $1 million, meaning the top capital gains tax rate would also be 39.6 percent. It also proposes levying an unrealized capital gains tax for the first time in US history. Much of the power and influence that the ultra-wealthy wield comes from the value of the assets they currently own. Elon Musk, one of the richest people on Earth, was able to buy Twitter for $44 billion not because he had that much cash in a savings account, but because he was worth north of $250 billion and owned so many valuable assets, such as his stakes in Tesla and SpaceX, that he could leverage to finance the deal.

Biden is also proposing raising the stock buyback tax from 1 percent to 4 percent. When a company buys its own shares back from the open market, the number of trading shares decreases, so the value per share increases. It’s a move that benefits shareholders; it’s become increasingly popular since the 1980s, but the practice has exploded in recent years. In 2022, companies spent a record $1.26 trillion on stock buybacks. Critics argue that corporations spend too much money on stock buybacks instead of reinvesting more of their profits into their workers. Biden’s budget estimates that $1.17 trillion will be raised between 2024 and 2033 from the billionaire minimum tax rate, the quadrupled stock buyback tax, and a multinational corporation minimum tax rate — a lot of money, but still less than what companies spend on stock buybacks in a single year.

Among the budget’s proposals, corporate taxes would rise from 21 percent to 28 percent. It also seeks to rein in corporations’ offshore tax avoidance by raising taxes on large US firms’ foreign profits from 10.5 percent to 21 percent. Amy Hanauer, executive director of the Institute on Taxation and Economic Policy, said cracking down on undertaxed foreign profits was long overdue. “I think the fact that we’ve failed to do this already is a little bit of egg on our face, internationally,” she said.

The budget also proposes closing a few major tax loopholes often enjoyed by the wealthy, including carried interest, a contentious tax rule that critics have long called on the government to plug up. It allows investment managers to pay a lower tax rate on their investment compensation than ordinary income. The president’s budget plan not only raises Medicare taxes on wealthy people’s investment income, but also closes a loophole that allows wealthy business owners to avoid paying Medicare taxes on their profits — a tax that’s automatically deducted from most workers’ paychecks. A real estate capital gains tax break would also be closed if Biden’s tax proposals became law.

A long US history of higher taxes on extreme wealth

Progressive advocates of tax reform are celebrating the ideas proposed in Biden’s budget. “I’m thrilled with what he’s proposed, relative to the heart of darkness in which we currently live,” said Payne.

But she underscored that it’s only a start. She said that she believes, for instance, that a 39.6 percent top tax rate is deeply inadequate. “If someone is not talking about 70 percent, 80 percent tax rates on incomes of centi-millionaires, they are missing the point of the exercise.”

Between 1944 and 1945, the top income tax rate was 94 percent — amid a period of “grave national danger,” President Roosevelt thought it was unconscionable for anyone to have a post-tax income of over $25,000, or the equivalent of a little over $400,000 today. As recently as 1986, the top income tax bracket was 50 percent. From 1965 to 1981, it was 70 percent. Raising it again to 39.6 percent restores the top income tax rate to pre-Trump levels. The top corporate tax rate was 35 percent before the Trump-era tax cuts that lowered it to its current 21 percent, but through most of the 1980s, it remained roughly around 40 percent.

Hanauer lamented that the stepped-up basis, a tax provision that levies lower capital gains taxes on an inherited asset, wasn’t totally eliminated in the new budget proposal. Still, while the budget doesn’t contain everything necessary to achieve tax fairness, she said, it’s an important opening volley. “I think if we look in the context of what American presidents have accomplished in the last 30 years, it’s a really bold vision,” said Hanauer.

The Republican backlash to these proposals will also be formidable. Speaker Kevin McCarthy and other leading House Republicans called the budget “reckless” in a statement, claiming that “President Biden’s unserious budget proposal includes trillions in new taxes that families will pay directly or through higher costs.”

“I think at the end of the day, Biden is an incredibly moderate president,” said Payne. “The fact that he’s being greeted with such pushback from this modest of a proposal is a true indication of how far away the country is from where it needs to go.”

Should secretaries pay higher taxes than billionaires?

The moderate president has been embracing a stirring progressive rhetoric when it comes to wealth inequality. Payne surmised that the administration’s loud calls to redistribute billionaire wealth are a sign of just how bad things have gotten. “I think that Biden sees a country that is on the brink,” she said. “And so, to me, it makes sense that a person in his position would propose what are important but not particularly transformative policies. But at least he’s getting the Titanic pointing away from the iceberg.” Pushing a consistent message around taxing the wealthy is a critical first step.

It’s also not an unpopular message. A Gallup poll last summer showed that a slim majority of Americans believe that the government should be able to redistribute wealth by imposing higher taxes on the rich. (Almost 80 percent of Democrats agree with the idea.) In a 2018 Gallup poll, more than 60 percent of people said rich people and corporations paid too little in taxes.

Biden has been taking advantage of political mobilization around the issue of economic inequality. He presents it as a no-brainer, a simple and undeniable truth that all working people can agree with. It was evident in the language Biden used in his SOTU address — “No billionaire should be paying a lower tax rate than a schoolteacher or a firefighter,” he said — and it’s evident in the language of the budget proposal, too. In mentioning the carried interest loophole, the proposal claims that it would end a mechanism that “allows some wealthy investment fund managers to pay tax at lower rates than their secretaries,” recalling billionaire Warren Buffet’s famous claim that his secretary paid more taxes than he did.

Biden’s tax proposals are also coming at a time when an increasing number of states are becoming tax havens that encourage the accumulation of extreme wealth instead of redistributing it. “The fact is most of our state tax codes are upside down,” said Hanauer, noting that most states raise a higher share of revenue from low-income Americans than they do from wealthy individuals. “So it becomes even more important that the federal government have a truly progressive tax code to make up for the fact that so many state tax codes are regressive.”

“Again, it’s nothing compared to what needs to happen,” said Payne. “But it’s something we haven’t seen out of Democrats in decades.”

Correction, March 12, 9:30 am ET: An earlier version of this story mistakenly said Biden’s new budget proposal did not reform the stepped-up basis tax loophole.

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