Unintended consequences: how a ‘billionaires tax’ would hurt America

Economy

As Elon Musk’s net worth approached $US300 billion ($398 billion) this week, Tesla’s boss made clear his position on US Democrats’ ultimately-doomed plans for a new billionaires tax.

“Eventually, they run out of other people’s money and then they come for you,” he tweeted on Monday.

Elon Musk scoffed at the ‘billionaires tax’ proposal.Credit:AP

Musk indicated the proposals, to tax a small number of America’s wealthiest citizens on gains including unrealised assets, such as shares, were a stealthy step towards demanding more from everyday citizens.

“This tax only covers 10 per cent of the $US3.5 trillion spending bill. Where will the other 90 per cent come from? The answer is you,” he wrote later in the week. “Spending is the real problem.”

Musk, who would stand to pay up to $US50 billion over five years, has raised few problems with government spending when it subsidised Tesla sales or funded rocket launch contracts for SpaceX – the other source of his paper wealth.

But the proposed tax targeting 700 billionaires, which this week garnered support from President Joe Biden before being dropped amid backlash from other party members, would not merely fund Democrats’ plans to pile enormous amounts of investment into everything from childcare to the fight against climate change. By taxing unrealised assets, instead of just income itself, it would open up a hornet’s nest of issues.

“The principle of the unrealised gain ideas, extended down, would cause havoc in millions of people’s lives,” said Henry Olden, a senior fellow at the Ethics and Public Policy Centre.

Authored by Democrat Senator Ron Wyden and backed by progressive former presidential candidate Elizabeth Warren, the proposals unveiled this week would apply to taxpayers with more than $US1 billion in assets or over $US100 million in income for three years in a row.

At the end of every tax year, billionaires’ tradeable assets would be appraised. The increase in their net worth over 12 months would be taxed at the top capital gains rate of 28.3 per cent.

Musk, whose net worth has increased by $US122 billion this year to become the world’s richest person, would face a $US34 billion bill for that period alone. Over the last five years, Amazon founder Jeff Bezos, worth $US196 billion, would pay as much as $US44 billion. Between them, America’s top 10 billionaires, a group that also includes Bill Gates and Mark Zuckerberg, would pay $US276 billion. Wyden insisted it would end a system in which Americans relying on monthly pay cheques are taxed at a higher rate than billionaires and “would ensure billionaires pay tax every year, just like working Americans”.

According to Forbes magazine, America’s 400 richest people grew their wealth by 40 per cent, or $US4.5 trillion, last year.

Meanwhile a leak of billionaires’ tax returns published by investigative news outlet ProPublica earlier this year found the likes of Musk and Bezos paid no federal income tax in some of the last 15 years, claiming that the richest paid an effective rate of around 3.4 per cent on their growing fortunes. This was not the result of evasion, however. Almost all of these billionaires’ wealth is made up of “unrealised” stakes in their companies. While they have pushed to the top of rich lists, their fortunes remain on paper until those shares have been sold.

Musk, who receives no salary, has rarely sold Tesla shares and said he never plans to, instead using his stake to borrow money with billions worth of shares posted as collateral. According to court records, he told younger brother Kimbal in 2016: “You do know that I don’t actually have cash, right? I have to borrow.” Musk has also put houses worth tens of millions of dollars up for sale this year. Tesla’s warning its share price could drop dramatically if banks called in their loans has also forced the chief executive to sell shares. The same could be likely if he was taxed on Tesla’s rising share price.

On Wednesday Jen Psaki, White House press secretary, said the idea has Biden’s backing “to make sure the highest-income Americans pay their fair share”.

High-profile senator Elizabeth Warren has been a vocal supporter of higher taxes on the uber-wealthy.Credit:AP

His support represented another lurch to the Left from the 78-year-old, who campaigned as a moderate but has supported a series of radical spending and tax measures. Despite calling for higher taxes on the super rich during the presidential campaign, he also presented himself as a unifier who could reach across the aisle.

As it turned out, not even Biden’s own party agreed. “I don’t like the connotation that we’re targeting different people,” said Joe Manchin, a Democrat Senator who has repeatedly thwarted the party’s progressive policy efforts. Even less independent politicians expressed scepticism. Senator Mark Warner warned it would favour “one asset class over another”.

The proposal has now been dropped, with Biden instead unveiling a plan for a tax on incomes above $US10 million a year.

However, the debate is unlikely to go away.

“The principle of the unrealised gain ideas, extended down, would cause havoc in millions of people’s lives.”

Taxing billionaires has become increasingly popular as share prices soar, but Olden says a market crash would put authorities in a difficult position if billionaires were able to claw back tax payments if their fortunes declined. “What president wants to be in charge when Elon Musk gets a $US30 billion check from the IRS? That’s one of the reasons why it’s dead on arrival.”

Aswath Damodaran, a professor at New York University’s Stern School of Business, says the tax would create enormous unintended consequences, such as driving share prices down as billionaires are forced to sell stakes to make payments.

“Nothing ever stays isolated to the group of people that are supposedly the target of these attacks,” he says.

Donald Trump, who could himself face paying the tax, suggested that America’s richest would flee to other nations. “Most [billionaires] don’t need to be in the US anyway. I know all of those very smartly run countries, and they are all thrilled by what the radical Left maniacs are doing in Congress,” he wrote.

Musk has further flung ideas, suggesting he could spend his fortune better than the US government could. “My plan is to use the money to get humanity to Mars,” he said.

Telegraph, London

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