Biden Seeking to Tax the Ultra-Wealthy. Here's How

The American tax code traditionally focuses on how much you earn, not how much you have. A new bill introduced in the House, and touted by President Biden, would change that. The so-called Billionaire Minimum Income Tax aims to set a floor on the amount of taxes that some of the wealthiest Americans will pay.

Read on to learn more about this proposal, how it works, and what chance it stands in a closely divided Congress.

What's in the bill?

The 34-page bill introduced in the House by Rep Steve Cohen (D-TN) would add some unprecedented measures to an already complex tax code.

The bill would introduce a net worth component to tax calculations, an unprecedented proposal in a tax system that typically focuses on a taxpayer's income. As it stands today, the provisions of the bill would only apply to those with a net worth over $100 million, or 0.01% of all Americans, according to a White House estimate. Those skirting the edge of the $100-million mark will have some leniency, as a taxpayer's new tax bill would not exceed 40% of that net worth overage.

Additionally, the bill would introduce a measure to tax unrealized gains. Typically, gains on investments or property are not taxable until the underlying asset is sold. For the taxpayers who fall into the above net worth category, the appreciation of assets will be considered in calculating the minimum amount of tax they will owe. According to the Biden Administration, this provision will prevent appreciated property from going untaxed for generations among the wealthiest Americans.

Establishing a floor

The general idea behind the bill is that Americans with hundreds of millions and billions of dollars will be beholden to a tax floor. According to the White House, the richest 400 billionaire families pay on average just over 8% of their income in taxes. Meanwhile, the average American pays closer to 13%.

Effectively, only those over the $100-million-net-worth mark will be affected by the new floor. For those taxpayers, the bill would require a calculation of their so-called "full income" equal to the sum of their taxable income and unrealized gains in a given year. The minimum tax for those taxpayers would be equal to 20% of this "full income."

Households and individuals who fall into the wealth bracket described above and already owe 20% or more of their "full income" in taxes wouldn't pay a penny more. Meanwhile, those paying under 20% would need to make additional payments until they reach that 20% threshold.

Political fortunes

It should be understood that this bill will not pass in its current form. Today's closely divided Capitol Hill has had difficulty passing even moderate legislation. This bill is far from being a piece of moderate legislation and has been assigned to the Republican Ways and Means Committee, where it will almost certainly die.

However, today's dead-on-arrival bill could be tomorrow's landmark legislation, and it bears recognizing that party leaders may be signaling their appetite for policy in future years. If Democrats can win handily in upcoming elections, there is a good chance that net worth and unrealized gains could become part of the tax code. For now, however, House leaders in the 117th Congress have all but put this bill to bed.