How much would Elon Musk pay?

Elon Musk at the Met Gala 2022 at the Metropolitan Museum of Art.

Angela Weiss | AFP | Getty Images

President Joe Biden received loud applause during his speech before the US Congress on Tuesday evening when he proposed a new tax on the rich.

“Accept my proposal for a minimum tax for billionaires,” Biden told Congress. “Because no billionaire should pay a lower tax rate than a school teacher or a firefighter.”

However, Biden’s billionaire tax also hits the biggest millionaires. And instead of just raising tax rates, he is effectively taxing wealth, including unsold stocks, bonds, and real estate.

In accordance with white house explainer As for the tax Biden first proposed last year, the Billionaire Minimum Tax would require households with total net wealth over $100 million to pay a minimum effective tax rate of 20% on an extended measure of income that includes unrealized capital gains.

Under the plan, households will calculate their effective tax rate for the minimum tax. If it falls below 20%, they will have to pay additional taxes to bring their effective rate up to 20%.

The big change is the taxation of unrealized capital gains as income. Currently, if a taxpayer owns stocks, bonds, real estate, or other assets, they usually don’t owe capital gains until they are sold. Biden proposes to tax “unrealized gains”, that is, a tax on the annual increase in the value of paper, even if it is not sold.

So if a tech founder owns $1 billion in stock and the stock rises in value to $1.5 billion within a year, they would have to pay up to $100 million in tax on $500 million in paper profits, even if they didn’t sell any. share.

The White House says it will account for losses through loans, and by spreading payments and loans over time. Taxpayers can spread the first payment, a tax on their general wealth, over nine years. The tax payment on annual income can then be spread over five years, which the White House says will “smooth annual fluctuations in investment income.”

However, taxing unrealized gains is becoming increasingly difficult for today’s wealthy, most of whose fortunes are tied to volatile technology stocks that fluctuate wildly from year to year.

Take the example of Elon Musk:

  • If the billionaire minimum tax began in 2020, he would have to pay a $31 billion tax on his total net worth, which was $156 billion at the start of the year.
  • In 2021, his net worth increased by $121 billion, so he had to pay $24 billion in taxes for the year.
  • However, in 2022, his net worth fell by $115 billion. Teslastock drop. If he has already paid taxes for 2021, he will pay billions in taxes on wealth he no longer has.
  • The government would then have to send him a $23 billion refund check. Or any loan for 2022 will be used for years and will depend on the recovery of Tesla shares.
  • If Musk needed to take out a margin credit to sell shares to pay the 2021 tax, those expenses would not be offset by the tax credit.

“Applying a tax to technology stocks and other volatile assets is difficult,” said Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center. “What if a multimillionaire is rich in stocks but doesn’t have enough money to pay taxes? Or can’t he borrow large sums against volatile stocks? And what happens if, after a rapid rise, the stock falls quickly? big checks?”

The Biden administration says that in addition to restoring “fairness” to the tax code, the minimum tax on billionaires will generate additional $360 billion in revenue over 10 years. The White House said the tax would only apply to the top one hundredth of a percent (0.01%) of US households. It states that more than half of income will come from households worth more than $1 billion.

Opponents say apart from being potentially unconstitutional, the billionaire minimum tax will be difficult to administer, especially for the IRS, which is already understaffed.

“Implementation-based taxation is the norm around the world,” said Erica York, senior economist and research manager at The Tax Foundation’s Center for Federal Tax Policy. “And for good reason, because the alternative of taxing unrealized profits would be extremely complex and administratively expensive.

Rosenthal added: “The super-rich own a lot of assets that will require a lot of valuations. How does the IRS determine if multimillionaires have filed correctly?

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