'Billionaire's Tax' Bill Returns To Congress As Supreme Court Debates Whether It May Be Unconstitutional

The discussion around a "billionaire's tax" is coming back to Congress, as the countdown clock for the 2024 election begins to tick.

Last week, Democratic representatives reintroduced a Biden-backed bill that seeks to issue a levy of 25% on the wealthiest Americans, including unrealized gains on stocks, bonds and real estate.

In the meantime, an upcoming decision by the Supreme Court could affect the result of this extremely divisive legislation that has the power to reduce the fiscal deficit by $3 trillion over ten years.

Taxing The Rich, Explained

Discussions about a special tax for the wealthiest Americans gained traction as part of Sen. Elizabeth Warren's presidential campaign for the 2020 election. In 2021, Warren, along with Bernie Sanders and other Democrats introduced The Ultra-Millionaire Tax Act of 2021, which proposed a 2% annual tax on households or trusts with a net worth above $50 million, and 3% for those surpassing the $1 billion. 

The tax applies to the entire net worth every year. According to Warren, it would allow the government to raise $3 trillion across 10 years "without raising taxes on the 99.95% of American households."

The U.S. government spent $1.7 trillion more than it collected during the fiscal year ending in September 2023. Budget has been a major source of tension in recent congressional cycles. This year alone, Capitol Hill faced several massive crises that risked leaving the public sector without cash.

In May, an inability to agree on where government funds should come from led the Congress to a standoff that took the Treasury inches close to running out of capital. The government relies on massive amounts of debt to make its obligations, since revenue from taxes is not enough to account for spending.

Most lawmakers agree that there's a need to reduce the fiscal deficit. Republicans say spending needs to be reduced; Democrats are seeking alternative sources of revenue.

In June, the limit on the amount of debt the U.S. government can acquire (also known as the debt ceiling) was suspended by a deal between former House Speaker Kevin McCarthy and president Joe Biden, pushing back the issue until January 2025.

But discussions about government funding continue to ripple across Congress. Recall the drama of the stop-gap bill that passed in November in order to avoid a government shutdown. The current bill only covers until mid-January 2024.

Biden's Billionaire Tax

Biden raised the issue of "a billionaire minimum tax" during his State of the Union address in February, presenting a more moderate version of Warren's bill.

"Reward work, not just wealth," said Biden.

"Pass my proposal for a billionaire minimum tax. Because no billionaire should pay a lower tax rate than a school teacher or a firefighter," he told Congress.

In Biden's version of the tax, households with net worths over $100 million would have to pay a minimum effective tax rate of 25% on their incomes.

Reps. Steve Cohen and Don Beyer reintroduced the bill last Wednesday along with 60 other Congressmen.

The most disruptive part of the proposal is that the minimum tax includes unrealized capital gains. This means that the richest percentile would need to pay taxes on the appreciation of stocks, bonds, real estate or other assets, even if they don't sell them.

Elon Musk, for instance, who made $121 billion in 2021 from his ownership of Tesla Inc TSLA stock, would have needed to pay the government $30 billion more than he did that year. Biden's plan includes refunds and tax credits when assets depreciate. So Musk, who lost $115 billion in 2022 due to a decline in Tesla shares, would have received a tax refund or credit of $28 billion, as per CNBC.

The Biden administration also expects the measure to reduce the fiscal deficit by $3 trillion over 10 years.

Supreme Court Steps In

On Tuesday, the Supreme Court is scheduled to discuss a key trial that risks making Biden's proposition unconstitutional.

The case, called Moore v. The United States will go to trial in June, and will likely yield a decision in the midst of the presidential election cycle.

What's at stake in the court's decision is whether it's constitutional for the government to put a levy on assets like stocks, bonds and real estate.

Charles and Kathleen Moore are suing the government after a law enacted during the Trump presidency, called the mandatory repatriation tax, has charged them with $14,729 in taxes on money they claimed they never saw.

The law was passed as a measure to tax earnings made by big companies overseas, according to Bloomberg. The couple acquired 13% of an India-based company called KisanKraft Machine Tools Private Ltd about 20 years ago, for $40,000.

In the time since, the company decided to reinvest its earnings, instead of distributing them to shareholders as dividends. So while the couple's wealth grew in the form of stocks of the KisanKraft, they didn't realize their gains.

If the court were to agree with the Moores claim, it would set a precedent for the unconstitutionality of taxing these types of assets, which could remove legitimacy from Biden's billionaire tax.

As per Solicitor General Elizabeth Prelogar, who ranks as the fourth-highest-ranking official in the Department of Justice, corporate earnings constitute income under the Sixteenth Amendment, which states that Congress may "lay and collect taxes on incomes, from whatever source derived."

She said that the Supreme Court "does not decide whether a tax may constitutionally be laid until it finds that Congress has laid it," thus making the decision on Moore v. U.S. less likely to affect Congress' decision on the billionaire’s tax, in her view.

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Illustration made with Midjourney AI.