Freedom

By Richard Rubin, Andrew Duehren

WASHINGTON—President Biden will propose a new minimum tax on households worth more than $100 million as part of his annual budget, the White House said Saturday, in a bid to ensure the very wealthiest Americans pay at least 20% in tax on their income and rising asset values each year.

The proposal would affect fewer than 20,000 households, and it would apply only to those who don’t pay at least 20% in tax on a combination of income as typically defined and their unrealized gains on unsold assets such as stocks and closely held businesses. The plan would generate roughly $360 billion in revenue over 10 years, according to a White House fact sheet released in advance of Monday’s full budget proposal. That is about twice as much money as raising the top individual income-tax rate to 39.6% from 37%, and it would affect a much smaller group of people.

The biggest chunk of money in the new Biden plan would come from taxes on unrealized gains built up over many years, which could include much of the wealth of founders of large technology companies such as Amazon.com Inc. and Facebook parent Meta Platforms Inc. Those people could spread their initial payments over nine years; subsequent annual minimum taxes could be spread over five years.

There would be no exemptions for particular asset classes, but there would be special rules for illiquid taxpayers. People wouldn’t have to make annual valuations of illiquid assets, and they could defer some taxes—with interest charges—until death or asset sale.

The proposal is the latest Biden administration effort to capture more revenue from the capital gains of wealthy Americans. Like other Democratic ideas, it would mark a significant change in how income is defined for tax purposes, creating a whole new separate tax structure that would capture rising asset values for the government even before those assets are sold.

The Biden plan contains several features that are different from previous attempts to tax the wealthiest sliver of Americans, such as annual wealth taxes or taxing assets as if they were sold each year.

“While there are differences between the president’s proposal and the Billionaires Income Tax, we’re rowing in the same direction,” said Senate Finance Committee Chairman Ron Wyden (D., Ore.), referring to his own plan.

Under the Biden plan, if assets declined in value, the future stream of payments would be adjusted downward. Value increases would lead to a new, larger stream of tax payments. Asset sales could also lead to adjustments in the required minimum-tax payments. The policy aim is effectively partial prepayment of taxes that would ultimately be owed at sale, death or gift, with a minimum average 20% tax rate over the long term.

Previous White House plans to tax unrealized capital gains at death and raise the capital-gains rate faced stiff Democratic opposition on Capitol Hill, though the administration still backs those ideas.

Mr. Wyden’s proposal, which would have been more focused on billionaires’ unrealized capital gains, drew support from Mr. Biden but failed to gain traction with top congressional Democrats last fall. Mr. Biden’s version, designed as a minimum tax, could face the same political constraints in the closely divided Congress and even more trouble next year if the House or Senate tips to Republican control.

If enacted, the measure would likely face legal challenges to its constitutionality under the 16th Amendment. Even with the additional funding sought by Mr. Biden, the Internal Revenue Service could struggle to administer the proposal and would find itself in protracted disputes with taxpayers.

Under current law, capital gains are taxed only when they are realized—when the asset is sold—and they are taxed at lower rates than ordinary income. When people die, those unrealized gains aren’t taxed as income. Instead, heirs pay capital-gains taxes only on the gains since the prior owner’s death, and only when the heirs sell. They do often owe estate taxes on their net worth at death.

That system creates an incentive for people to hold appreciated assets until death. Many very wealthy people do just that, reporting taxable incomes each year that are far less than the gains in their wealth. The Biden plan would sharply reduce, but not eliminate, that incentive.

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Crafting proposals to raise more tax revenue from wealthy and high-income households, as well as corporations, that are acceptable to the whole party has been a central challenge for Democrats as they have sought to pass their economic agenda. Lawmakers and Biden administration officials are hopeful that talks on that agenda can restart in the coming weeks, with the goal of passing a bill that raises taxes before the end of the summer after months of stalled attempts.

Previous versions of that proposal already contain more than $1 trillion in tax increases that have broad backing among Democrats, so lawmakers may not need the new Biden minimum tax in the short run.