Biden’s Billionaire Tax: An Empty Threat or A Risk Too Great?

According to the White House, billionaires in America pay less than half of the income tax of the average worker. Some pay no tax at all.

It is for this reason, alongside crippling national debt, that Biden is proposing a Billionaire’s Tax. Although, many argue it is less of a wealth tax and more of an income tax reform.

Under the plan, households worth over $100M, who do not already pay 20% on their unrealised gains, will be forced to do so. The reason why so many of the 700 billionaires thought to exist across the USA do not already do so is because no tax is currently incurred on assets until sold. They are not classified as income or for this purpose, realised gains, however this is set to change under Biden in a move that could generate more than $360BN over the next decade.

We covered a very similar story at Agreus in the height of the pandemic about a wealth tax inflicted on the UK.

In an open letter to Chancellor of the Exchequer Rishi Sunak, the Partners in Progress made of 30 high-net-worth individuals, asked for a more progressive system of taxation which, if passed, would see the group of UK wealth holders paying a higher tax to reduce the pressure on the treasury to deal with present and future crises. It would have been applicable to far more Brits with the threshold marked at just £3.6M and was estimated to generate more than £70BN a year. A lot more over the course of a decade than the $360BN set out by Biden in his fiscal 2023 budget.

The wealth tax was quickly dismissed by the UK government, as it had already been by Prime Minister Boris Johnson the year before, that was however before the UK stacked up more than £2.2TRN in debt.

A similar stance is being taken in the US where Biden plans to cut $1TRN in deficit through the introduction of the reform but it is not an argument accepted by many.

Under the plan, households will be taxed on unrealised gains for the first time which, according to the White House will “eliminate the inefficient shelling of income for decades or generations.” However, opposers of the bill suggest it will be anything but efficient to reform income tax with simpler and fairer solutions including scrapping the Stepping Up Basis which enables inheritors of wealth to avoid capital gains tax when their benefactor passes away.

On one hand you have the statistic that US billionaires pay 8.2% of their income and unrealised gains in taxes, half of the ordinary citizen. On the other, you have to remind yourself that America is a capitalist democracy and that aside, not every asset holder has an income to match. This is particularly the case for beneficiaries of estates who unexpectedly found wealth but do not have a revenue stream to support it or to afford the incoming tax structure.

Family Offices on the other hand are now starting to seriously consider what a billionaire’s tax might mean for their finances as much of Biden’s early manifesto was targeted towards the wealthy and dismissed by many as empty threats.

During his election campaign, Biden pledged to bring in higher taxes on the wealthy by unstitching much of Trump’s 2017 policy and increasing top federal income tax from 37% to a pre-Trump rate of 39.6%. It was also suggested that he would raise corporate tax from 21% to 28% and estate tax from 40% to 45%.

Biden’s early ambition to return estate tax to its 2009 threshold would also mean lowering the exemption amounts from $11.58 million for estate and gift taxes in 2020 to $3.5 million for the estate tax and $1 million for the gift tax while a reversal of the current step-up in basis rule could jeopardise multigenerational wealth transfer.

The rule as touched upon earlier allows owners of valuable, appreciated assets to retain ownership of the asset until they die while discounting any appreciation on tax since acquisition. The rule which is referred to as a loophole facilitates multigenerational wealth transfer without incurring Capital Gains Tax on the increase in value but is; like much, set to change under Biden or at least some have suggested it would be the best alternative to an income tax reform.

Boston and London-based Multi Family Office, TwinFocus, has urged Family Offices to consider how to give away funds as part of their longer-term multigenerational goals and, to take into account if they can actually afford it.

They have advised Family Offices to take advantage of the current benefits before they change but only if it fits into a longer-term succession plan.

“For the exceptionally wealthy looking to take full advantage of the current lifetime gift exemption, their current concerns should revolve around how much to gift, how to gift it and who should gift it. There is a myriad of factors to consider such as a potential beneficiary’s age, instilling the responsibilities of wealth upon the next generation, selection of fiduciaries, asset protection benefits, and the size of the family balance sheet.”

Others of course are in disbelief that the plans will materialise but for many Family Offices, the risk is simply too high. It is a great reminder of the importance of having trusted and skilled professionals working for you to ensure your Family Office is best prepared for whatever comes next.