President Biden released his 2022 $5.8 Trillion spending  budget last week and stated his intent to  finance increases in projected   expenditure programs by raising the top tax rate and  imposing new taxes on the nation’s wealthiest citizens.

Biden called for a special tax of at least 20% on the income of American households worth more than $100 Million,  income to include unrealized gains on liquid assets, such as stocks and bonds, which are currently only taxed when they are sold, gifted or subject to Estate Taxes on death.

I did a bit of research and it seems that there are about 130 million households in the U.S. About 35,000 of these have a net worth over $100 Million.

It takes only $22 Million to become a member in the infamous “1%” club which is, perhaps by coincidence, the maximum amount that spouses may together pass on to their heirs without incurring the dreaded Estate Taxes.

It’s obvious, therefore, that those worth over $100 Million constitute a VERY small number indeed.  I don’t think  it  would be easy to identify all of these 35,000 households. While the stats on Billionaires are apparently easy to find, zooming in on the beggars within this elite group may be problematic. If the IRS were to assign,  say,  4 agents to each case whose job it would be  to locate and then audit these people, it would take a small army of auditors to ensure proper assessments. Just what the IRS needs-more work and a bigger backlog.

I would like to suggest the  entire structure  of Biden’s tax  plan is problematic. I support his intentions to create a fairer tax system, but I believe that some of his ideas are not compatible with current  tax law  and will meet with the opposition of highly-paid tax lawyers and accountants.

Below are the problems I have considered:

  1. To the best of my knowledge, no other country has ever tried to impose an income tax on unrealized capital gains. In some cases autocratic despots have engaged in a total confiscation of privately-owned assets and RICO laws in the U.S. are structured to allow the government to seize property from accused racketeers. However, in general, taxing unrealized profits is a no-no!

The Sixteenth Amendment to the Constitution gives the Federal Government the right to tax “income”. I have been a CPA for 55 years and have never seen a definition of “ income” that includes unrealized gains on property. So, we have ourselves an issue that is likely to end up in The Supreme Court and will also likely make a goodly number of tax accountants and lawyers very wealthy.

  1. I think most accountants and lawyers would agree that tax changes that impose new burdens on taxpayers are NEVER retroactive. In 1972, Canada made capital gains includable in income for the first time. However, they introduced a “Valuation Day”- December 31, 1971- and only gainsarising after that datewere factored into the tax mix.  Yet another issue for The supreme court.
  2. Biden’s plan is to tax  unrealized gains only on “liquid assets such as stocks and bonds”. It seems clear that he does not intend to tax  gains on real estate that has not yet been sold.

While the concept of “liquid assets”  may, at first blush, seem straight forward, there are numerous issues that may severely curtail  Biden’s anticipated revenues. First, a significant number of the beleaguered 35,000 earned their  wealth through real estate construction or acquisitions. Their investments are likely still mainly real estate based.  Even those who made their fortunes by other means conceivably have a significant percentage of their portfolios invested in apartments, shopping centers and commercial buildings as well as their personal  mansions, yachts, and airplanes.   They may also own what might be considered liquid portfolios through  private personal holding companies. Are the shares of these companies by extension to be deemed  “liquid”? Another issue for The Supreme Court.

While on the subject of liquidity, if I own 100 shares of Amazon, this is clearly a “liquid” investment. I could sell these shares with only  a few clicks of my computer’s mouse . But what about Jeff Bezos, Amazon’s founder, who apparently owns over 50 million of Amazon’s Shares?  Could  he cash out as easily? In the area of business  valuation, accountants often ascribe a premium to    a significant or controlling interest (Bezos owns about 17% of Amazon), but such an interest can  in no way be  considered liquid. If he ever decided to divest, he could only do so over an extended time period without having to accept fire-sale offers.

I  am beginning to pity the members of The Supreme Court!

  1. There are other issues as well. For example, what happens if an unrealized gain is taxed in one year and the same investment drops in value or is sold for less (or an outright loss) in a subsequent year? Will the IRS  grant a refund?

Another question is how to avoid double tax when the Estate Tax applies. Assume that a mega-wealthy person makes an investment for $1. Over time, the value grows to $100,000. Again over time, the law now imposes a 20% tax on the accumulated growth. The individual now dies and  his estate is large enough to be subject to the Estate Tax , which is presently levied at a flat rate of 40%. The same $100,000 would form part of the total estate. This situation clearly results in serious double taxation.

At this point, we might consider wholesale resignations within The Supreme Court!

  1. Finally, we might consider  how effective Mr. Biden’s proposal is likely to be. His wealth tax is apparently to be levied on “Households”. If we assume that relatively few of the mega-mega wealthy households include children, we can then assume that a household consists of two married partners.

The Estate Tax was first legislated in 1916. Since then, a countless number of tax accountants and lawyers have made an excellent living out of providing ways and means to reduce or avoid this tax. Probably the most common technique has been to set up trusts for one’s children and grandchildren. The same complex tax structures will no doubt be used to reduce exposure to the new proposed income tax changes. In fact, the concept of liquid vs. non-liquid opens up even greater opportunities for effective tax avoidance. I have already mentioned that using a private corporation to  hold liquid investments could very well  transform  liquid assets into one big non-liquid asset. Modern day alchemy is alive and well and living in America.

I would hate to end  this fiscal dissection without making some suggestions for alternative tax changes that I believe make more sense and /or would result in a more equitable distribution of wealth.

First, I note that President Biden  has also proposed raising corporate tax rates from 21% to 28%. I have hoped for literally decades that a President and Congress would finally differentiate between public corporations and private ones. In Canada, for example, a Canadian-Controlled  Private Corporation pays a low tax rate each year on up to $500,000  of active business income. This allows for  reasonable business expansion. In the U.S. there are almost 32 million small businesses. This amounts to 99.7% of all U.S. Businesses that have employees. (Check with Google if you don’t believe me.) I believe that the increase in corporate tax rates should only apply to public companies and, perhaps, to privately-owned corporations with 100 or more employees.

While on the subject of corporations, I suggest that taxes on public companies  be levied on accounting profits and not  on “taxable income” as has always

been the case up to now. For example, in 2020, Amazon reported over $20 Billion in U.S. pre-tax accounting profits but  paid under $2 Billion in federal income tax.  Eliminating stock option write-offs, large tax-depreciation deductions in excess of “real” depreciation of assets, and various other tax credits would go a long way towards both  simplifying our tax structure and increasing  government revenues.

President Biden also proposed to tax all income of the mega-wealthy at a minimum tax rate of 20%. In many cases I believe , this may very well be considered wishful thinking. As I pointed out last year, in a previous article  I wrote for PolitiZoom, the very wealthy easily avoid taxes by not drawing income and, instead,  using borrowed money to pay their living expenses. This is not a viable strategy for anyone other than the top fraction  of the 1%, but consider the following example:

Mr. Megabucks has $100 Million in growth investments which will likely provide him with big capital gains down the road. These investments do not pay dividends. He is the CEO of a large private company but does not draw a salary. Nevertheless, he needs $1 Million a year to pay for his living expenses. He therefore borrows this amount every year for, say, 10 years pledging his investments as collateral.  At the end of this time, he owes his banker $11-$12 Million, which is a negligible amount compared to his investment capital, even without considering  any growth in his portfolio .

What the U.S.   needs is a law that treats loans taken each year over and above repayments as income if this excess exceeds ,say, $100,000 a year.

One last item to add to my wish list for change.

I read recently that 57% of U.S. households paid  no federal income tax in 2021, although most were subject to Social Security taxes. At the same time the divide between the haves and the have-nots is widening at an alarming rate.

In Southern California,  workers at major grocery chains voted recently to authorize strike action. They are asking for a $5 an hour raise  in pay, while the chains are offering 60 cents. I read that the union pointed to the pay of the CEO of Kroger’s to reinforce their demands. It seems that he was paid  $20.5  million in 2020, about 900 times the salary of the chain’s median worker!

I would defy this man to stand up in front of  all the company’s employees and  tell them to their faces “I’m worth almost 1000 times more than each of you for the job I do”.

Personally, I have no problem with the fortunes made by  people like Gates, Bezos, Musk, or Buffett. These men are visionaries who have done what no one had done before. They donate to charities and invest in space exploration and new technologies.

But at the big business corporate level, I believe that there should be some attempt to create a more equitable split of income. Although a great deal more research is needed,  what if  there was a law (for example) that said  no CEO could earn more annually than 100 times the median income of all employees who have been with the company for at least five years?

Based on the information I read about the situation at Kroger’s, it appears that the median employee salary is $25,000. If the CEO were to receive 100 x $25,000, he would still earn $2.5 million.  If the median salary were raised to $30,000,  he would get an extra $500,000. $5,000 raises would obviously  reduce the number of households that pay no income tax.

Mr. Biden: I believe your fiscal policies should not only  be geared to soak the rich. Rather, they should be focused on raising the living standards of all Americans.

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  1. Just because rich people have ways of avoiding taxes is not an excuse for not taxing them. rich people by design are bad for the economy. Whatever Biden does to get rich people to pay more taxes, and no I don’t think 4 IRS investigators is enough, we should have 100 IRS detectives for each rich person to investigate their taxes.

    I don’t think your supreme court concerns are not valid. Income taxes are supported by the 16th amendment. defining income by us law will clearly pass all supreme court challenge.

  2. Taxing unrealized gain will make this proposal a nonstarter. Better to close various loopholes that allow unreasonable deferment. There is no value in the gain until it is is realized. We should have learned this lesson when the housing bubble popped. Our society needs to stop assigning value where value does not exist. Not only Bezos but also many of the very wealthy have their money tied up in illiquid as well as liquid assets. Stock is way too volatile. If they tried to divest themselves of stock too quickly, it could destroy the 401(k)s of regular people. There is the question of day of the year do we arbitrarily assign to be the day of stock evaluation for tax purposes. I think Biden should maybe ask Nick Hanauer for advice.


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