'Billionaires income tax': What we know about Sen. Ron Wyden's plan

Sen. Ron Wyden, D-Ore., has introduced a new “billionaires income tax” that would force the wealthy to pay taxes each year as their assets grow rather than waiting until they sell off their holdings.

Wyden released the details of the proposal on Tuesday as Congress weighs how to pay for the bulk of President Joe Biden’s agenda: a vast expansion of the social safety net and improvements to physical infrastructure such as roads and bridges.

Precisely how much Wyden’s proposal would generate – and how likely it is to win support – is unclear. His office said it would raise “hundreds of billions of dollars.” On Wednesday, Sen. Joe Manchin, D-W.Va., denounced the plan as “divisive.”

The changes would apply only to the wealthiest American taxpayers, who can avoid taxes by holding on to tradable assets, such as stocks, and then borrow against those assets to fund their lifestyles. They pay interest to lenders but avoid taxes while their assets continue to grow.

Under Wyden’s plan, people like Amazon founder Jeff Bezos, Tesla founder Elon Musk and Facebook founder Mark Zuckerberg would pay taxes based on the unrealized gains from those assets each year rather than waiting until they cash those assets in.

“There are two tax codes in America. The first is mandatory for workers who pay taxes out of every paycheck,” Wyden said in a prepared statement. “The second is voluntary for billionaires who defer paying taxes for years, if not indefinitely.”

Here is what we know about how Wyden’s 107-page plan would work.

To whom does the plan apply?

The change would apply to taxpayers who have either $100 million in income or $1 billion in assets for three consecutive years. Taxpayers need only hit one of those two marks in each of those three years to trigger the tax.

About 700 taxpayers would meet those criteria, according to Wyden’s office.

Once an individual triggers the tax, they must continue to pay the tax annually until both their income drops below $50 million and their assets drop below $500 million for three consecutive years.

Trusts are treated a little differently. The income and asset thresholds that trigger the tax are lower: $10 million in income and $100 million in assets for three straight years.

What will be taxed?

Wyden's proposal divides assets into two categories that would be taxed differently.

The first category is for “tradable covered assets,” those that can be easily traded, such as stocks. Real estate, business interests and everything else that isn’t considered a tradable asset falls into the second category.

Each year, tradable assets would be “marked to market.” That means any taxpayer who meets the income and asset thresholds would have to pay taxes on the change in value.

For example, if the value of a stock increases from $9 million to $10 million, the tax would apply to the $1 million difference. Taxpayers also would take losses in the same year. So, if the value of the same stock dropped from $9 million to $8 million, the $1 million loss could be claimed.

Ascribing values to nontradable assets each year is harder, so the plan wouldn’t require those to be paid annually.

Instead, the owner would pay regular taxes on the asset when they sell them plus an additional charge. Wyden’s office likens the additional charge to interest on the tax deferred while the taxpayer held the asset.

For example, if a taxpayer bought real estate in 2022 and held it until 2032, they would not pay annual taxes on any increase in value of the property. When the property is sold in 2032, taxes and the surcharge would be due.

How much will the taxes cost each year?

Tradable assets, such as stocks, would be taxed as long-term capital gains at about 23.8%. For non-tradable assets, the combination of tax and the additional surcharge would be capped at 49%.

When would the plan kick in?

It would start in 2022, and the ultrawealthy who meet the criteria would have to pay up for years of untaxed gains. After that, they would be taxed on the incremental changes in value each year.

The plan allows anyone who becomes an applicable taxpayer to spread that first payment, likely to be much higher than the annual obligation, across five equal, annual installments.

In the first year, those taxpayers also can designate $1 billion worth of stock in a single corporation as part of the second category, deferring taxes until it is sold. Wyden’s office said that provision is meant to allow corporate founders to maintain their controlling interest in a company they grew.

Won’t the wealthy individuals the proposal targets find a way around it?

Wyden’s plan includes several protections meant to prevent these taxpayers from finding loopholes.

Gifts or bequests to anyone other than a spouse, for example, would trigger the tax. Charitable giving would not be taxed.

Trusts also would be subject to the tax but at the lower income and asset thresholds to dissuade billionaires from spreading their wealth into smaller increments to avoid the tax. And the plan creates special rules for some trusts and puts guardrails on the use of deferred compensation, life insurance and annuities.

This article originally appeared on USA TODAY: Billionaires tax: What we know about Sen. Ron Wyden's income tax plan