Austen Weinberg – Elon Musk, one of the wealthiest men in the world, has recently been involved in discussions regarding how billionaires should be taxed. On November 6, 2021, Musk posted a poll on Twitter, asking his followers whether they support his proposition to sell 10% of Tesla stock in order to address the issue of unrealized gains being a means of tax avoidance. Two days later, 3,275,711 people have voted. 57.4% voted “yes,” that Elon Musk should sell 10% of his Tesla stock and pay taxes on his gains. 42.6% of voters voted “no,” that he should not sell his stock.
Musk’s poll was posted just over a week after Senate Finance Committee Chairman Ron Wyden proposed a tax plan that would tax billionaires on unrealized gains. That is, a capital gains tax would be imposed on individuals “who have a net worth of $1 billion or annual income of $100 million for the three prior consecutive years,” for any paper gains. Simply put, this group of investors would have an annual tax liability for the annual gains of their stock holdings, even if the stock is not sold, and losses on stock holdings would offset gains.
Musk has publicly stated on Twitter that he “[does] not take a cash salary or bonus from anywhere. I only have stock, thus the only way for me to pay taxes personally is to sell stock.” Many of the world’s richest people operate in a similar fashion. Thus, a core reason for the Wyden proposal was to “ensure billionaires pay taxes every year, just like working Americans.” Senator Wyden further stated that “no working person in America thinks it’s right that they pay their taxes and billionaires don’t.”
However, this billionaire tax proposal drew major criticism, not only from the billionaires, but from average Americans as well. Of course, under this proposal, billionaires such as Elon Musk and Jeff Bezos would be responsible for billions of dollars in tax liability annually. Concerns about the trickle-down effect of this proposal and potential impacts on nonbillionaires are being raised. Specifically, these investors are concerned that they, too, will eventually be taxed on the tradable investment assets remaining in their portfolios.
The other major concern is that the proposal would completely change the way that Americans have been taxed for over a century. Currently, investors only incur tax liability when they realize their gains, or, in other words, sell their assets. Again, under the Wyden proposal, high net worth investors would be taxed annually on the year-to-date gains of their assets, whether or not a sale was made. Thus, these investors would be forced to rethink their investment strategies and financial planning ideas to account for this proposed change. Additionally, taxing unrealized capital gains would benefit companies with relatively stable stock prices or predictable fluctuations in price, while deterring some investors from investing in riskier companies that might provide a higher return on investment.
On the other hand, supporters of the proposal note that holding investment assets with no plan to sell is a means of tax avoidance. When investors hold their assets until death, their estate transfers to the investor’s heirs, and the estate is only taxed on the gains after the transfer, that is, if the assets are sold. If the assets are not sold, then no tax is paid on the assets. Many believe that the strategies that the world’s wealthiest use in order to avoid taxes are unfair because either most Americans do not have enough capital benefit from those strategies or because they simply do not know how to implement those strategies.
The Wyden billionaire tax proposal is certainly an unorthodox plan to raise a substantial amount of tax revenue, while potentially alleviating the growing taxpayer inequality that exists between most Americans and America’s wealthiest. Even if the Wyden proposal doesn’t become law, it is clear that billionaires and retail investors alike should keep an eye on evolving capital gains tax policies.