A Billion Questions About the Billionaires’ Tax

October 28, 2021 Updated: November 3, 2021


“According to reports, Republicans are still furiously debating changes to their bill. And no one knows when they will put the bill on the floor. A bill like this deserves weeks of debate on the floor,” Sen. Chuck Schumer (D-N.Y.) said in November 2017.

With respect to whatever is decided behind closed doors in the Capitol building by Democratic members of Congress, Schumer needs to follow the advice of Schumer. Democracy needs the bright light of transparency. Democracy needs unfettered public debate to surface issues important to the consideration of any legislation.

Senate Finance Committee Chair Ron Wyden (D-Ore.) appears to have surrounded himself with an academic who’s who of wealth tax advocates and is allegedly writing a bill that will tax appreciation of the assets of billionaires. Whatever is developed needs to see the bright light of committee hearings, where both Congress and citizens can understand and debate whatever that proposal turns out to be.

Question No. 1 is whether any income tax that’s assessed only against billionaires and that’s assessed on appreciation without a realization event is a direct tax and therefore unconstitutional. It matters not in a country of laws whether such a law would be popular or whether most citizens would believe it to be fair. The federal courts will be unwilling and unable to assess the fairness or popularity of any newly passed income tax on appreciation for only certain citizens without a realization event. The federal courts will rely exclusively on the Constitution and the precedent of prior cases.

Rhetoric and current woke interpretations of the Constitution aside, reading Supreme Court Chief Justice John Roberts’s comments about property in National Federation of Independent Business v. Sebelius and taking into account the current make-up of the Supreme Court, one is hard-pressed to conclude that this Supreme Court would look favorably on any tax that begins with a premise that only taxpayers who own a certain total value of property would be subject to income taxation without an underlying realization event.

The remainder of the billion questions revolve around the effect of a tax on billionaire taxpayers and on the general economy.

Would the taxpayer who’s required to pay a tax on the appreciation of stocks be required to pay income taxes on the sale of stocks to pay the tax? If so, a proposed 20 percent tax on appreciation would be only a starting point for the ultimate amount of taxes due annually.

If a billionaire’s wealth is the result of building their own company and therefore likely having little or no cost basis in their stock, the question of whether they would need to pay an income tax on the stocks sold to pay the tax is critical.

If Elon Musk were assessed a 20 percent federal tax on his stock appreciation in any given year, he would need to sell stock to pay the tax. Would he be able to sell the stock necessary to pay the federal tax on appreciation without paying a second federal income tax on that sale?

If Musk was still a California resident, his sale of stock to pay the new federal tax on appreciation would expose him to an income tax on the sale that would be greater than the tax on the appreciation of his shares. The income tax on the sale of the stock would be the sum of the capital gains tax rate and the net investment income tax rate, along with California taxes. The taxes on the stock sale would total an additional 37.1 percent.

Even if there was no additional federal tax on the sale of stock to pay the appreciation tax, California would be still entitled to its 13.3 percent tax.

And what of the effect of taxing current appreciation on future sales of stock? Would the stocks on which an appreciation tax had been paid be available for tax-free sales in the future? Would that appreciation be added to the basis of the stock?

After putting aside fairness, tax rates, and so forth, there are practical economic issues to consider. Stocks are at all-time highs. Real estate is at all-time highs. What assumptions are made with respect to expected revenues from a tax on the appreciation of assets?

Would billionaires move away from investing in assets where there’s a current tax on appreciation? Would the expectation of current taxes on appreciation increase the investment expectation thresholds for investors? Would investment be curtailed, costing jobs and innovation?

Would investors be inclined to invest in stocks where, if successful, the founders would be required to annually sell boatloads of stock to pay federal taxes? In many stocks, the “float” would increase dramatically, presumably affecting stock prices.

Billionaires aren’t required to invest their funds to satisfy increased spending by the government. If there’s an expectation of current taxation of an investor without a tax-free source of the funds necessary to pay a current tax on appreciation, there’s almost a guarantee that this will result in a chilling effect on future investment.

One can never forget the words of Second Circuit Court Judge Learned Hand in the 1930s: “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

The good judge’s words surely haven’t been lost on U.S. billionaires.

Schumer understates the issue with respect to public debate on legislation. New and unique proposals of taxation need to be considered from multiple viewpoints before they’re dropped from above without debate.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Hank Adler
Mr. Hank Adler is an associate professor at Chapman University. He was in public accounting for almost thirty-four years, the last twenty as a top partner at Deloitte & Touche.