Special Tax on Billionaires Is No Threat to Middle-Class—It’s a Solution to A Big Problem

The Billionaire Minimum Income Tax is absolutely no threat to working people—but the chronic under-taxing of the hyper-wealthy absolutely is.

By William Rice

It’s an old political trick to try to defeat a reform you don’t like by claiming it will wind up hurting the very people it’s meant to help. That’s exactly what opponents of the Biden-Harris administration’s Billionaire Minimum Income Tax (BMIT) are trying to do, so it’s important to set the record straight. 

The BMIT would close one of the most maddening loopholes in the tax code, the one that allows people with fortunes of over $100 million to pay relatively little in federal income taxes—and sometimes nothing at all. The reason the super-wealthy can get away with so much tax dodging is that our tax system isn’t currently set up to tax them properly. 

The vast majority of us live off our paychecks, with every dollar of income accounted for and taxes withheld from each check. It’s not the same if you’re a billionaire, or even “just” a centi-millionaire (worth at least $100 million). These lucky few—only about 64,000 households in the whole country—can live off their vast wealth while paying little in taxes. The strategy has a creepy nickname (Buy, Borrow, Die). Let’s get into how it works.

First of all, once a person is ultra-wealthy, they don’t need to work in order to afford their basic needs, so there may not be any wages to tax, but they still have expenses that require them to have money on hand. In order to pay those expenses, they could sell some of their assets or investments that have gone up in value (“realizing” the gain), which would trigger capital-gains taxes. Instead, super-rich investors avoid paying those capital gains taxes by borrowing against their rising fortunes. Because they’re so rich and getting richer all the time, they are considered excellent credit risks and so can borrow at very low rates. For the same reason, they can keep rolling over the loans, using new ones to pay off old ones. All that borrowed money is tax-free. 

If they don’t have enough cash to pay the modest interest owed, they may have to occasionally sell off a winning investment and pay some tax (albeit at as much as half-off the tax rate charged on an equivalent amount of wage income). But the bottom line is that they are essentially able to avoid paying a fair amount of taxes because they are so rich. That’s not how a fair and effective tax system is supposed to work. 

Oh, and the “die” part of the formula? That refers to another loophole called “stepped up basis”  that makes unrealized capital gains simply disappear for tax purposes once inherited by the next generation. So a lifetime of gains can go untaxed forever. 

The BMIT addresses the problem by taxing the key element of this tax-dodging scheme: the rising value of the super-rich’s investments, whether they sell them or not. This necessary reform on a handful of super-rich households would raise over half a trillion dollars in tax revenue over 10 years. And because the same tax is due whether or not the investments are sold, the BMIT would offer the added value of loosening up investment money for more productive uses, since investments would no longer  be “locked in” by a desire to avoid generating capital gains.  

There are allowances built into the proposal for hard-to-assess assets like private businesses. But trillions and trillions of dollars of unrealized gains are in stocks, bonds and other publicly traded financial securities that are priced every day. 

Ending the outrage of low- and no-tax billionaires is understandably popular with the public. By huge polling margins—including majorities of Republicans—Americans want to more effectively  tax billionaires and other super-wealthy people through methods such as the BMIT. 

Such reforms are understandably less popular with billionaires and other super-wealthy people. They and members of the “wealth protection industry” who live off them—money managers, accountants, lawyers, etc.—are determined to preserve their access to a tax-free lifestyle.

That’s why lobbyists and politicians who also benefit from billionaire largesse have spread rumors that average families would somehow be impacted by the BMIT and similar proposals to better tax the handful of richest households in the nation.  Middle-income homeowners and savers are nervously asking if the equity in their homes or the balances in their tax-advantaged retirement accounts would somehow be hit by a tax exclusively targeting people worth over $100 million. (The answer, of course, is an emphatic “no.”) 

The BMIT is absolutely no threat to the middle-class—but the chronic under-taxing of the hyper-wealthy absolutely is. By dodging billions of dollars in taxes every year, billionaires and centi-millionaires deprive us of revenue we need to preserve, improve and expand essential public services like Social Security, Medicare, education and housing. They further widen the wealth gaps. And all that high-end tax avoidance drives up the national debt. So if you ever hear someone (whether purposely misleading or sadly misinformed) claim the BMIT is a problem, explain why it’s actually a solution.