Joe Biden’s ill-considered billionaire tax

As mis-namings go, Joe Biden’s “billionaire minimum income tax”, which he unveiled last week, is 10 times understated. The tax, which would hit Americans with assets of $100mn or more, is the president’s latest attempt to ensure the wealthiest pay a fairer share to the Internal Revenue Service. On political grounds, the measure polls well. It is also explicitly designed to get around the US constitution’s alleged — though highly contestable — bar on wealth taxes. Whether Biden’s 20 per cent minimum federal tax would pass muster with this heavily conservative Supreme Court is doubtful. But the proposal looks more like a gimmick than a well-designed proposal. The White House needs to think much more comprehensively about tax reform.

Strictly speaking, Biden’s idea is not a wealth tax. Americans worth more than $100mn would be liable to tax on their unrealised capital gains. In principle that is fine. America’s super wealthy pay a far lower effective rate than the average taxpayer, which is both fiscally and ethically unsupportable. A chief reason for this is that the wealthy hold on to assets to avoid capital gains. But there are simpler and less easily gameable ways of addressing this form of tax avoidance. The most obvious would be to scrap the “stepped-up basis”, which enables inheritors of wealth to avoid capital gains tax when their benefactor passes away.

As it stands Biden’s plan intends to bring forward taxes that would eventually be paid anyway, which means it would merely be borrowing from the future. But scrapping the stepped-up basis is necessary to achieve even that, and Biden is not proposing to do that. So there are grounds to doubt the White House’s estimate that the new tax would raise a net $36bn a year over the next decade. Moreover, if his aim is to catch income that should be taxed but falls outside the normal rules, why use a 20 per cent rate instead of the standard rates on income and capital gains?

It is already clear that Biden’s plan will not pass Congress. Joe Manchin, the West Virginia Democrat, has said he will oppose it, which means that without Republican support it would fall short of the 51 Senate threshold. Doubtless the White House anticipated Manchin’s opposition and is thus laying down a marker ahead of this November’s midterm elections. If that is the aim, then the White House should think much more ambitiously. The US system as a whole needs to be overhauled with a widening and simplification of a tax code that has become too complex for all but the super-wealthy to navigate.

It is a measure of the shrunken ambitions of US politics that such an overhaul has not been under consideration. The last time such a reform was passed was in 1986, when Ronald Reagan won over enough Democrats to pass it. The same political logic applies today. Scrapping the loophole-ridden US tax code while lowering the overall rate would be popular and efficient. That would include getting rid of the debt interest subsidies that encourage high corporate leverage. It would also remove the incentive for the super-wealthy to borrow against their assets to avoid capital gains.

The US tax code has become grossly unfair and is easily manipulated by rich individuals and corporations. The only way to take on those with a vested stake is to propose a dramatic simplification. The Republican stance is to pass tax cuts without reform. The Democratic one is to raise taxes within the existing code. The best way of cutting through this polarised impasse is to embrace a grand bargain. Biden needs to go back to the drawing board.