The concentration of wealth at the top of the scale is one of the central stories of the U.S. economy, and the trend is accelerating. Whereas assets held by the top 400 wealthiest Americans were worth the equivalent of 9% of gross domestic product in 2010, the figure has doubled since then, to 18%.
Tax policy, meanwhile, has not kept up with the changing scale and nature of wealth in America. Despite the upsurge in their fortunes, the nation's multibillionaires, most of them tech magnates, contribute little to the public coffers.
That's because they structure their affairs so as to have little taxable income. They usually accept no salary, or a low one compared with other corporate executives. Their companies — places like Amazon, Tesla, Alphabet or Facebook — often do not distribute dividends. This means that the founders of these firms — Jeff Bezos, Elon Musk, Sergei Brin, Larry Page, Mark Zuckerberg, collectively worth more than $600 billion today — do not owe any significant amount of individual income tax, unless they realize capital gains by selling their shares. By holding on to their shares, these billionaires can avoid paying any notable income tax for decades, potentially forever.
Earning no taxable income hardly prevents the ultrawealthy from spending lavishly if they so wish. Billionaires, needless to say, are rich enough to obtain loans. Musk has pledged about half of his Tesla stock as collateral for personal loans, according to public financial filings, which has proved to be more than enough to afford buying multiple mansions in the Bel-Air district of Los Angeles, a stunning car collection and two private jets. To be sure, many ordinary taxpayers have some unrealized capital gains on financial investments or on a house they own, but only billionaires can live off unrealized gains and consume tax-free for decades.
Fortunately, there is a fairly straightforward remedy for this injustice: The government can tax these billionaires' unrealized capital gains — forcing them to foot the bill they have been avoiding. With a Democratic majority in Congress and a president determined to tax wealth as work is taxed, this solution may not only be economically justified, but also politically feasible, and it would avoid the legal fight that other forms of wealth taxation might initiate.
How would such a plan work? All the unrealized capital gains of billionaires could be deemed realized on a certain date — say April 1, 2021. (That is, the gains would be treated, for tax purposes, as if the stocks had been cashed in on that date.) Once deemed realized, these gains would be subject to the individual income tax — just like regular capital gains, but in this case with payments spread over 10 years. This solution, easy to implement and squarely focused on the ultrawealthy, should appeal to moderate as well as left-leaning senators who caucus with the Democrats, from Joe Manchin, D-W.Va., to Bernie Sanders, I-Vt.
Economically, a tax on the stock of unrealized capital gains is an ideal tax, because it doesn't distort behavior. The gains, after all, have already been made: Billionaires cannot go back in time and try to become less wealthy. Therefore, the traditional argument that taxation discourages effort and innovation becomes moot.
Legally, because it is a tax on income — not on wealth — the constitutionality of such a tax is not in question. Sen. Elizabeth Warren, D-Mass., has proposed a direct tax on the wealth of the ultrarich, a measure we also support and have advised her on. But although many prominent constitutional scholars believe a wealth tax is constitutional, there is a risk that a conservative Supreme Court might disagree. (The 16th Amendment specifies that Congress has the power to "lay and collect taxes on incomes, from whatever source derived.")
The capital gains measure we propose would pass constitutional muster because it simply plugs a loophole in the current income tax (namely that the ultrarich can easily defer it). Moreover, there is precedent for a tax that's structured this way: The 2017 Tax Cuts and Jobs Act imposed a similar tax on corporations. Upon its passage, all the earnings that U.S. multinationals had booked and retained abroad tax-free since 1986 were deemed repatriated to the United States and subject to taxation, with payments spread over eight years. What was done yesterday for multinationals can be done tomorrow for billionaires.
Administratively, the tax we propose would be straightforward to implement. Since it would be a one-time tax affecting only billionaires — fewer than 1,000 individuals — the Internal Revenue Service could audit each return. Avoidance would be hard: The government has extensive information about the wealth of billionaires — including detailed annual income tax returns and balance sheets of the businesses they own, not to mention the daily estimates compiled by Forbes and Bloomberg.
A new tax along these lines would — unsurprisingly — raise considerable sums. According to Forbes, U.S. billionaires owned $4.26 trillion on April 1 of this year, of which unrealized gains accounted for more than $2.5 trillion, by our calculations. During his campaign, President Joe Biden proposed to increase the tax rate on capital gains from 20% to 39.6%. Should he make good on this promise, a one-time tax on the unrealized gains of billionaires would generate $1 trillion, enough to fund the expansion of the child tax credit — one of the most important provisions in the American Rescue Act, yet one that is set to expire next year — for a full decade. Even at the lower rate, the new tax would generate half a trillion dollars.
Politically, this tax would complement and strengthen the two main changes to individual income taxation proposed by Biden during his campaign — not only the increase in the tax rate on realized capital gains but also a separate proposal to tax capital gains at death. The wealthy could not avoid the new higher rate by deferring the realization of their capital gains, nor could they pass on their unrealized gains to their children, which they might otherwise attempt to do using trusts.
Relative to Biden's campaign proposal, our proposal does not change the amount of tax theoretically owed by billionaires over their lifetime. It simply makes them pay now rather than at some indeterminate future point. It brings in $1 trillion for sure in the coming decade, rather than a more uncertain amount whose collection might not start for decades.
But might it be unfair and financially disruptive to force someone like Amazon's Bezos to immediately pay a tax equal to almost 40% of his (paper) wealth? (Bezos, the CEO and founder of Amazon, owns The Washington Post.) There is no reason to think so. Spread over a decade, the payments would amount to 4% of his current wealth per year. He could either borrow money to settle this tax liability — as some billionaires do to fund other expenses — or sell 4% of his stake each year. In the case of Amazon, of which Bezos owns 10%, that would mean 0.4% of the corporation's stock would change hands each year over that decade, not enough to affect the stock price.
Another objection to our proposal is that forcing the ultrawealthy to pay their taxes would weaken the country's flagship companies — that it's good for these firms when their founders know their self-interest is tied to continued high performance. But there is no evidence that giant businesses decline whenever their ownership becomes more diversified. Even with a diluted stake — still worth billions! — Zuckerberg could remain Facebook's CEO if he's the best person for the job. Steve Jobs famously returned to Apple in 1996 and transformed it into the world's preeminent tech company, despite owning virtually none of it.
American voters support higher taxes on the well-off, and particularly on the superwealthy. Gallup polls consistently find that more than 60% of Americans think that "upper income" people pay "too little" in taxes. And an Economist-YouGov poll found that 63% of Democrats supported an Warren-style wealth tax focused on people worth more than $50 million (as did 46% of Republicans.) So there would probably be an appetite for this proposal.
Billionaires have benefited handsomely from America's infrastructure, public research, universities and investments in the technologies — like the internet — that make their businesses so successful. What will make the country prosperous in the future is better infrastructure and public investments in tomorrow's technologies, not low taxes for today's ultrawealthy.
Emmanuel Saez is a professor of economics at the University of California, Berkeley. He is co-author of "The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay."
Gabriel Zucman is a professor of economics at the University of California, Berkeley. He is co-author of "The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay."
This piece was written for The Washington Post.