In this episode of Adam Talks, Adam Bergman, Esq. discusses President Biden’s proposed billionaire tax and how it may not impact just billionaires because of the way it is imposed.

Biden’s Billionaire Tax – Are We Next?

Hey, everyone, I’m Adam Bergman, tax attorney and founder of IRA Financial. Welcome to another episode of Adam Talks.

Well, I had a chuckle going through the White House’s press release, March 28, 2022, on this proposed billionaire’s tax. And again, this is not a political podcast at all. This is bipartisan. I focus on retirement accounts, taxation. Really, really bipartisan.

But, this press release was comical. Basically, end of March 2022, President Biden came out with a budget, and part of this budget, his 2023 federal budget, he has this proposed new tax on the ultra-wealthy. But the press release, and I’ll read the press release, the actual title, it says President’s budget rewards work, not wealth, with new billionaire minimum income tax. Well, if you read that just the title, which a lot of us just do because we’re so busy, we say, well, who cares about a bunch of billionaires? What do we care? So you tax them extra, whatever! Not going to impact me. I’m never going to be a billionaire. But, if you actually read through press release and actually examine the proposed tax, it’s scary because it could impact you and me. It really can. It could impact our kids, too. So, let me explain.

So basically, this billionaire’s minimum tax calls for a 20% tax on households with a net worth of more than, not $1 billion, but $100 million. That doesn’t seem like a billionaire tax. And guess what? It’s not 100 million of income. No, no, no. It’s $100 million, applies to total income, which guess what includes, of course, taxable earnings, but also unrealized capital gains or asset growth. Okay. Not earned income. Not just dividends, interest, rental, royalties, commission, W-2, 1099. No, no, no- unrealized appreciation. So, if you own a small startup that maybe has a valuation, maybe around $100 million. And guess what? There’s lots of startups that have valuations around that number. Doesn’t mean they have $100 million cash, right? They may have a $1 million in cash or $2 million in cash, but they have this valuation.

I spoke to a guy this weekend from Houston, the American dream. This guy was born in Iran, came to the US, studied, he’s an engineer, started this company, and he got a 55 times earning valuation. He raised $90 million like a $300 million dollar valuation. The guy makes $125,000 a year, okay? The company has money and has put $40 million in the bank, but it barely makes money. Okay.

So, based off this tax, he would owe, assuming he’s not paying 20% on his income, and let’s say he owned 40% of this $300 million dollar company, now he has a net worth of $120 million. So he would owe, if he’s not paying 20% on $120 million, $20 million in tax, he’s got to come up with the cash. Now, they let you pay it out over five, ten years. But whatever, they’re forcing you to pay tax on unappreciated, or I should say unrecognized, income. Is it constitutional? We’ll get there in a minute. But, it’s something that Senator Warren talked about Wyden it’s been kicked around by the few of the progressive Dems. And it’s just surprising that President Biden kind of would focus on this position, which is not a winnable position. It’s clear that you’re not going to win reelection or win any votes for moderates with pushing this. So I’m not sure what his rationale is for kind of putting this out there and really focusing on it.

But it has far reaching consequences. Because even though this will likely not pass and we’ll get to what some of the Democrats are saying about it, it basically puts it on the shelf. So it’s been proposed. The President estimates that it’s going to reduce the deficit by about $360 billion. So, there’s a number attached to this proposal. So now, even if it doesn’t pass, it’s on the shelf and any future politician could just pull it off the shelf and use it, since a value, a number has been associated with this provision. So anytime they need money, raise money, this is something they can just pull off the shelf and use.

So, when I first read it, again, I focused on billionaires and I said, well, like I said, I don’t know any billionaires. I don’t really care about them. It’s their problem. But, when you start looking at $100 million, which is a misleading statement, when they say this budget and bill targets billionaires, because it doesn’t, it targets people that have $100 million of net worth, doesn’t mean they have income, just means they have $100 million in net worth. Now, we all know valuations change, right? Your company can be worth X in a year or two years, look at WeWork, Instacart, valuations change considerably, especially in cryptos or AI, emerging assets. You may have a high valuation one year and you may not the next year, things happen. But if you start paying tax,  that valuation becomes an issue.

So, let me just bring you into the press release, a little bit more detail. So according to the press release, there’s more than 700 billionaires that saw their wealth increased by a trillion dollars. But again, this budget doesn’t seem to just target billionaires. It’s targeting millionaires. So they say billionaires like these just pay 8% of their total realized and unrealized income. No kidding. They pay only 8% of their unrealized income because the income tax doesn’t tax their unrealized income. That is not part of our income tax regime. Right. I’m a tax lawyer. I went to law school. I have a master’s in tax law.

If you look at section 61, which will get to in a minute, talks about what gross income is, unrealized appreciation on assets is not gross income. So, of course, billionaires don’t pay a higher tax rate on their appreciated assets because they don’t have to. So, again, another misleading statement in this press release.

What else did it say? So according to this release, the billionaires minimum tax; again, it’s not a billionaire’s minimum income tax because the threshold is $100 million, not a billion. Again, another misleading statement ensures that the very wealthiest Americans pay a tax rate of at least 20% on their full income, including unrealized appreciation. But income is not defined as unrealized appreciation. So, it’s not in section 61. So, they’re going to change the definition for these folks. It’s not fair to say they’re not paying enough tax on their definition of income, which includes unrealized appreciation when it’s not part of the tax code. So, it’s kind of disappointing.

So they claim the tax will plow into the top 100th of one percent of American households; those with net worth over $100 million. Again, not a billionaire tax, a $100 millionaire tax.

Okay. So how will it work? Basically, if a wealthy household is already paying 20% on their full income (standard and unrealized), they’re good to go. But you got a start-up. Let’s say you own 50%, your shares worth $100 million and you have $2 million of income or a million of income. So you have a net worth of $101 million. Let’s say you pay $360,000 of tax, 36% on the million. It’s not good enough because you owe $20 million now of tax, because that $100 million dollar valuation is now subject to tax. So, now you have to pay tax on the $20 million of unrealized appreciation over nine years and then five years for top-up payments on new income going forward. So it’s going to keep going. So basically you have nine years plus five to keep paying this.

What’s going to happen? First of all, is this manageable? No. You’re going to get into valuation games. People are going to try to keep the valuation of their business low until they have to sell it. Obviously, we know valuations can change annually and it discourages entrepreneurs to build businesses, right? If you’re going to be stuck paying tax on unappreciated assets for ten years when the companies, you haven’t recognized that income right? It’s just unappreciated. It’s not like you sold the stock or got a dividend, got an interest payment or actually receive compensation for services. It’s literally unrealized. It’s crazy. So it’s going to be very difficult to administer. It’s never going to pass. We’ll get to a statement by some of the Democrats.

But is this legal? Number one? Is it legal? Well, the 16th Amendment to the Constitution says this: it allows Congress to levy an income tax without portioning among the States on the basis of population. Okay, so the 16th Amendment, Congress has the power to lay and collect taxes on income, not on assets, not on valuations, not on net worth, on income from whatever source arrived without apportionment. Okay, so the IRS defines income tax as taxes on income, both earned (salaries) and unearned, like interest and dividends. Income tax can be levied on both individuals and businesses. Okay, what’s income? Income and appreciation of asset is not income, right? Section 61 of the tax code states what is gross income? It means all income from whatever source it derives, including, but not limited to the following, compensation, gross income from business, selling property, interest, rents, royalties, dividends, annuities, income from life insurance, endowments, pensions, income discharges and indebtedness, distributed share partnership, gross income – income in respect of a decedent, income from interest in estate or trust.

So appreciated assets, you haven’t earned anything, right? There’s no dividend that was sent to you. There’s no interest payment sent to you. There’s no constructive ownership, right? You didn’t do anything and receive anything. All you do is you own an asset, it’s worth this, or it’s gone up in value. Is that income to tax? I don’t think so. And I think if this ever passed it would be a challenge and I think the provision would get thrown out. But Supreme Court, because I don’t think a tax on appreciated asset is income. They can change the definition of income; I guess Congress could do that. I’m just not sure, I do believe it will be it will get challenged, and I do think the Supreme Court would argue that this type of tax is not an income tax and thus, not feasible for Congress to administer.

Now, it’s possible, that it does get through. There are other taxes, like estate taxes and other type of local spending taxes, that may not satisfy the definition of income, like an estate tax right? You die, you pay tax. We know it’s part of our tax code. So again, it’s possible that this would be something that could be part of the tax code. But is it feasible to get passed? And I think the chances are pretty slim.

According to Democrats from New Jersey, Josh Gottheimer, he said this, “billionaires tax and how they put this forward doesn’t make much sense” and pretty much very little chance of passing. And when a moderate Democrat who’s Josh Gottheimer, Democrat from Jersey, he’s on the problem solving caucus. He’s a moderate Dem. When he doesn’t support this, you’re not going to get any Republicans support this. If the mods aren’t supporting it, you’re going to have a few Progressives that will support it. It won’t be enough. Okay. But, it says precedent, right? It’s on the shelf. Any future politician could just pull it off the shelf and use it. So, it’s dangerous. It’s misleading because it’s not a billionaire tax, right? We know the net worth is $100 million, not a billion.

So, a little bit disappointed in the Democrats and issuing, especially the White House, issuing this press release. I don’t want to blame the Democrats. I’ll blame the White House because the press release is misleading. I suggest you take a look at it. You can Google president budget White House press release, March 28, 2022. Again, the title is super misleading “Wealth with New Billionaire Minimum Income Tax,” which is crazy, because I do know people that have companies worth $100 million plus and they’re struggling, like you and me. They make $150, $200 grand in salary. They have a good business that ultimately down the road they may be able to sell, but they haven’t realized any of it right? Just a valuation on paper that some banker somewhere said that, oh, I think your company is worth $100 to 120 million. Doesn’t mean he’ll get more than $40 for it, or $50 or $10, but that’s what someone’s putting on paper.

So, you’re going to have some shenanigans. You’re going to have entrepreneurs kind of reduce value until they sell it, which can hurt growth capital formation, because entrepreneurs may not want to raise money because they don’t want to show a valuation above the $100 million, which will make them pay the tax at a 20% clip.

It’s a backwards tax. Don’t think it’s constitutional, but it’s out there. So it’s something that again, if the threshold is $100 million, who’s to say five years, it goes down to $20 million or $10 million or $5 million. Right? Slippery slope argument. Dangerous stuff.

So, I’m obviously hopeful this will never go anywhere, and I don’t think we have anything to worry about. But again, it’s a misleading press release, and I think a dangerous theme of taxation where you’re taxing people’s appreciation instead of actually recognizing the income. It will change the whole context of our tax code. It’s possible; we know anything can happen, but not likely to pass. So I wanted to share it.

I wish I had some better, more positive type of tax proposals. Doesn’t necessarily mean just cutting taxes. I’m not all about just paying no tax, but this is dangerous. I don’t think this is helpful. Yeah, it’ll raise some tax money, but I think it’s going to do more harm than good. The good news is it’s not going to pass. If the moderate dems aren’t supporting it, there’s no chance it’s going to pass. But like I said, it’s out there. So anyone can always just grab it again and try to use the revenue raised on that to pay for other programs.

So there you have it. I would encourage you to read it because I think you’ll get a chuckle out of it. It’s just so poorly written and it’s so misleading. I’m surprised the White House released it, really. And whoever their proofreaders or editors are or their press corps; the fact that they can put a billionaire tax on the title when the income threshold is $100 million, not a billion, is ridiculous. I just can’t believe it.

So anyways, thanks for listening. Thanks for watching. If you are on YouTube, I appreciate it. Give me a like, subscribe, and check me out next week. This is a weekly podcast. If you’re interested in other topics in the self-directed retirement world, check out AdBits, which drops every Tuesday, and AdMail, which drops every Thursday. And you can pick them up wherever you listen to podcasts, or on YouTube, if you want to look at me and it tackles various topics on self-directed retirement topics: alternative assets, taxation, retirement accounts, current events. A lot of fun stuff. You’ll learn stuff. It’s free. Check it out!

Anyways, have a great rest of your day, rest your week and I’ll talk to everyone again soon. Take care.