A New Billionaires Income Tax May Not Go Anywhere Right Now. But Democrats See a Winning Issue.

Democratic lawmakers have introduced bills in the House and Senate to tax billionaires’ income. Pictured, billionaire Jeff Bezos. (Michael M. Santiago/Getty Images)

Democratic lawmakers introduced identical bills in the House and Senate to tax billionaires earlier this week, resurrecting a proposal that has failed to become law in the past.

The “billionaires income tax” is again unlikely to progress with Republicans in control of Congress and the White House. However, Sen. Ron Wyden (D-Ore.), who introduced the Senate bill, “takes the long view on legislation like this,” says Ryan Carey, Wyden’s deputy policy director.

If and when Democrats are in control again, there will be a need to restore government services and “pass an affirmative agenda,” Carey says. This bill, which proponents say could potentially raise more than $500 billion over a decade, could help fund that effort. “We want to make sure that we’re ready,” he says.

The idea of a billionaire tax is also “extraordinarily popular,” Carey says, noting that it is likely to be among agenda items put forward by Democrats heading into the midterm elections and beyond.

“It’s not something a lot of Democrats need to be shy about at this point,” he says.

Americans are divided about many things, but “the large majority of the population believe these guys aren’t paying their fair share,” agrees Steve Wamhoff, federal policy director at the Institute on Taxation and Economic Policy, a nonprofit tax policy group.

The proposal does have critics, however. “There’s no evidence in the real world that a billionaire income tax could be made workable,” says William McBride, chief economist at the Tax Foundation, a nonprofit.

One problem with taxing the super rich is that they are mobile—they don’t need to remain in the U.S. or keep their assets in the country. “They just pack up and leave,” McBride says. According to the Tax Foundation’s research, several countries have repealed their wealth taxes because “they raise little revenue, create high administrative costs, and induce an outflow of wealthy individuals and their money.”

Wamhoff, however, doesn’t see that as a real risk in the U.S.. “I don’t know how much incentive there ever is to leave the country,” he says. “There’s a reason why the U.S. is home to a lot of billionaires.”

The latest billionaires income tax proposal, which was also introduced in the House by Democratic Reps. Steve Cohen of Tennessee and Don Beyer of Virginia, would apply to fewer than 1,000 taxpayers. Specifically, it’s aimed at individuals who made more than $100 million in annual income for three consecutive years, or those who had $1 billion in assets for three consecutive years.

Wyden introduced this legislation in 2023, but that same year, Reps. Cohen and Beyer proposed a minimum 25% tax rate on households with a net worth of more than $100 million. Neither bill passed, as the House was controlled by Republicans at the time. The House legislation was in sync with a proposal by former Preside n t Joe Biden —and one advocated by then-vice president Kamala Harris when she ran for president.

The premise of the current proposal is that billionaires don’t pay their fair share in taxes—unlike everyday Americans, who pay taxes on their earned income. Instead, the super wealthy tend to buy and hold assets and then borrow against those assets to extract the cash they need to live on and buy more things. The cash that’s borrowed isn’t taxed, although wealthy borrowers would pay interest on the loans.

To break this cycle, the legislation would tax unrealized gains on investment assets such as stocks and bonds. Any losses could be carried back for up to three years to recoup taxes from a previous year, according to Carey. “Sometimes you have down years, it’s clearly something we’ve accounted for,” he says.

It would also tax the interest on any tax deferred on non-tradable assets, such as real estate at the time the property is sold. This would be determined by allocating an equal amount of gain to each year the property is owned and figuring out how much tax would have been owed on the annual gain.

These measures would replace what seems like a more straight forward “wealth tax” assessed on an individual’s net worth, as those proposals face potential constitutional hurdles, Carey says.

As proposed, the legislation “would shut down different types of tax avoidance strategies that very wealthy people use,” often involving the deferral of capital gains, Wamhoff says. Though gains on an investment, or profits made from operating a business, may not be technically “income,” most economists would agree that these gains are in fact income, he adds.

A paper published in August by the National Bureau of Economic Research found that the top 400 taxpayers in the U.S., had an approximate average effective tax rate of only 24% from 2018-20 compared with 30% for the overall population.

But the Tax Foundation’s McBride says the premise of this research is flawed, and points to a paper by David Splinter, chief economist at the Joint Committee on Taxation, a nonpartisan committee of Congress. Splinter counters that the average effective tax rate of the top 400 taxpayers in the country was actually higher than the general population from 2018-20, at 38% versus the 25%.

Write to Abby Schultz at abby.schultz@barrons.com