On March 28, the Biden administration released its second round of desired revenue increase proposals in General explanations of the administration’s revenue proposals for the 2023 financial year, (the 2023 green paper.) These proposals represent the administration’s first comprehensive tax proposals since the failure of Build Back Better in Congress late last year. For tax advisers, green paper the proposals are always interesting – both for what is included and what is not. While these proposals may not progress, especially given the current Congress, it is helpful to see what topics are being considered and to be able to address customer concerns about the proposals.
Certainly the headliner of the 2023 season Green The pound is the billionaires tax. It is a wealth-based tax, but it is not a wealth tax in the traditional sense (i.e. a tax calculated as a percentage of a taxpayer’s total wealth). In contrast, the Biden proposal, while only applying to people meeting a wealth threshold, would impose a minimum tax rate on income, earnings and unrealized gain rather than total wealth.
Under the Biden proposal, a taxpayer with more than $200 million in net assets would have an annual tax liability of at least 20% of all taxable income and unrealized gains. The tax payable for the initial year could be paid in nine annual installments, while the liability for the future year could be paid in five years. The amount of minimum tax paid as a result of the unrealized gain could be used as a credit against a future disposition of this asset. There are tax phase-in provisions for those with more than $100 million but less than $200 million.
Like Senator Warren’s proposed wealth tax, a practical question practitioners ask is how net asset value will be determined and reported. The Biden proposal requires those whose wealth exceeds the threshold to file annual reports showing by asset class the total base and estimated value as of December 31. For actively traded assets, the value will be December 31.st assess. Assets that are not regularly traded would be valued “using the greater of the original or adjusted cost basis, the latest valuation event of investments, borrowings or financial statements, or other methods approved by the Secretary … Valuations of non-tradable assets would not be required annually and would instead increase by a conservative floating annual yield (the five-year Treasury rate plus two percentage points) between valuations.The IRS may offer taxpayers means of appealing assessments, for example through an assessment.
This proposal is likely to attract attention with its catchy name and be the main novelty this year from the point of view of wealthy people. However, heading into an election year in a Congress that has been unable to advance Build Back Better, it is not clear that this tax will find much traction given its similarities to Senator Wyden’s Proposal last year, what Speaker Nancy Pelosi would have called a publicity stunt. Senator Manchin has previously said the Biden proposal is “tough” because you can’t tax people “on things you don’t have.”
Other notable rate increases for high net worth individuals brought back from 2022 green paper include increasing the top marginal rate for ordinary income to 39.6% for single taxpayers earning over $400,000 and married taxpayers filing jointly with income over $450,000 and increasing the rate on long-term capital gains and eligible dividends at 37% for taxpayers with income over $1 million (40.8% including net tax on investment income).