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She Has a Plan for That: Examining the Ultra-Millionaire Tax

Posted on Mar. 29, 2021

Senate Finance Committee member Elizabeth Warren, D-Mass., campaigned for president on the promise of concrete plans to solve problems like big corporations and billionaires paying insufficient taxes. It was such a central part of her identity as a candidate that her campaign emblazoned the slogan on T-shirts and tote bags.

There was truth in advertising — Warren’s tax plans were more specific than most presidential candidates venture to assert. The newly proposed statutory language in the Ultra-Millionaire Tax Act of 2021 (S. 510) is the culmination of a plan she outlined over two years ago while a candidate for the Democratic presidential nomination.

The ultra-millionaire tax (UMT) continues the general tradition of tax changes targeted at wealthier taxpayers — like the alternative minimum tax, which was famously enacted in 1969 after Treasury Secretary Joseph W. Barr explained to Congress that 155 taxpayers with incomes exceeding $200,000 had paid no federal income tax the year before. Using outrage over the low or nonexistent tax bills of wealthy Americans as fuel for change wasn’t even new then — it had been used in the 1930s to limit loss deductions, as Joseph J. Thorndike has explained. (Prior coverage: Tax Notes, Oct. 10, 2016, p. 153.)

The Warren bill would impose a new, annual 2 percent tax on the net value of all taxable assets greater than $50 million and less than $1 billion. For taxpayers with assets exceeding $1 billion, there’s an added 1 percent tax on everything above that amount. And if Congress passes universal single-payer healthcare legislation, the 3 percent tax on taxpayers with assets exceeding $1 billion bumps up to 6 percent.

Under the wealth tax, a taxpayer is an individual, a married couple, and specific trusts, except for tax-exempt trusts under section 501(a). The statute combines trusts and treats them as a single taxpayer if they have “substantially the same beneficiaries.” The IRS is given the authority to postpone the payment of tax under the UMT for “a reasonable period not to exceed 5 years,” in the event of severe liquidity constraints or undue hardship on an ongoing enterprise.

The net value of a taxpayer’s assets would be determined by looking at all the taxpayer’s property, whether “real or personal, tangible or intangible, wherever situated,” and reduced by any debts owed, except for some secured debts, according to the bill. Property valued at $50,000 or less is excluded if it’s tangible and isn’t used in the taxpayer’s trade or business, is eligible for a business expense deduction under section 212, or is a collectible like a boat, aircraft, or antique.

The taxpayer’s property is determined by looking to the estate tax rules. If it would be included in the taxpayer’s estate at death, it’s “property of the taxpayer” for the UMT. Also, taxpayer property would be any part of a grantor trust that the individual is treated as owning and some gifts made by the taxpayer after the date of enactment of the UMT to family members who aren’t yet 18.

The constitutionality of the UMT is still a matter of debate, one that probably won’t be sorted out until after a bill is passed and then challenged in court. Warren cites law professors who argue that a wealth tax is not a direct tax, which relieves it from the constitutional requirement of needing to be apportioned among the states. The direct tax clauses aren’t complete constitutional mysteries, but their rare invocation and historical wrinkles make the debate a lively one.

Someone Else Will Plan That: Valuation

The devil is always in the details in mark-to-market plans, and in this one, the IRS and Treasury must deal with those details. The statute directs the Treasury secretary to “establish rules and methods for determining the value of any asset for purposes of this subtitle.” This expressly includes valuation rules for assets that are not publicly traded and those without a readily ascertainable value. It would likely be a major regulatory project for Treasury and the IRS if it becomes necessary, and by the statute they have only 12 months after the date of enactment to get the new rules out.

The statute contemplates that formulas could be involved in the regulations, probably for administrative simplicity, but it doesn’t mandate them. The statutory guidance regarding formulaic valuation methods is couched in language that makes them optional. The rules “may utilize retrospective and prospective formulaic valuation methods not currently in use by the Secretary,” for example.

The bill also blesses potential mandatory formulas for designated assets and gives some possibilities, including “formulaic approaches based on proxies for determining presumptive valuations, formulaic approaches based on prospective adjustments from purchase prices or other prior events, or formulaic approaches based on retrospectively adding deferral charges based on eventual sale prices or other specified later events indicative of valuation.” The proposed statute permits regulations that address the use of valuation discounts.

Economists Emmanuel Saez and Gabriel Zucman argue that the potential valuation problems are overstated. In 2019 they noted that “80 percent of the wealth of the top 0.1 percent wealthiest families is in the form of assets that are traded and have a clear market price: publicly traded stock, bonds, and real estate,” and that valuing the 20 percent mostly in private businesses “is anything but impossible.” They suggested that the IRS require banks to report their valuations of private businesses for wealth tax enforcement.

FATCA Redux: Reporting

The UMT proposal gives the IRS and Treasury 12 months to write reporting regulations regarding the net value of assets, which, like the valuation rules, would likely be an all-hands-on-deck project. Information reporting requirements could be imposed through regulations on “financial institutions, business entities, or other persons, including requiring business entities to provide estimates of the value of the entity itself,” according to the proposed statutory text.

The Foreign Account Tax Compliance Act is supposed to be the model for information reporting, but the UMT text leaves it up to the IRS and Treasury to decide when to impose FATCA-like reporting requirements. The statute suggests that UMT reporting may be done as part of FATCA reporting.

Implementing FATCA took time, and the odds are high for a similarly long rollout of a wealth tax. Recall that the IRS bumped the implementation date of FATCA rules because financial institutions needed time to create and test their reporting systems. And FATCA didn’t ask for reporting from quite as broad a range of entities. FATCA isn’t concerned with active businesses, but that’s not the case for the UMT.

Audits

Increasing audits of high-income taxpayers generally is the theme of two recent House bills, and a recent Treasury Inspector General for Tax Administration report suggested prioritizing high-income taxpayers in collection efforts.

One criticism of the UMT proposal when it was a campaign plan was that revenue “leakage” would occur because of tax avoidance and underpayment. To combat that, the UMT requires the IRS to audit a minimum of 30 percent of the taxpayers required to pay the UMT every year. By comparison, the Stop Corporations and High Earners From Avoiding Taxes and Enforce the Rules Strictly Act sets a target of auditing 50 percent of individual returns with a disclosed total income of at least $10 million, and the IRS Enhancement and Tax Gap Reduction Act of 2021 (H.R. 1116) would have 50 percent of individuals or joint returns with gross income of at least $100 million audited each year.

Death and Expatriation

The UMT proposal is coordinated with the estate tax and the expatriation requirements. If a UMT taxpayer dies during the tax year, the tax is prorated for the number of days they were alive that year. The estate tax is imposed after the UMT. Taxpayers who expatriate to avoid the UMT would pay a 40 percent rate while they are covered expatriates under section 877A.

How Much?

If you’re not an ultra-millionaire and need a way to haul around your spare change, Warren still sells (cotton, made in the United States, union-printed) tote bags emblazoned with “The Ultra-Millionaire Tax: Two Cents” on them for $32 each, which might be some of the only tax-related swag ever produced by a presidential campaign. If you lean frugal, the campaign stickers are discounted. The claim is that “just two cents in change has the power to pay for big, structural change,” which might be overstating things a smidge, depending on whom you ask.

Warren looks to the analysis of Saez and Zucman for a revenue estimate of $3 trillion over 10 years. Saez and Zucman estimate that about 100,000 American families would be liable for the wealth tax in 2023. They explained that their revenue estimate increased from their 2019 estimate because “wealth at the top, particularly among billionaires, has grown in the two years since then,” and the new bill delays the collection of the tax until 2023, but the prior version was supposed to start in 2019. The 2019 estimate anticipated that the tax would affect about 75,000 taxpayers and raise $2.75 trillion between 2019 and 2028.

Other revenue estimates aren’t quite that high, and a few of the more modest estimates come from professors who are headed to positions in Treasury. Lily L. Batchelder and David Kamin estimated in 2019 that Warren’s proposal would raise $2.6 trillion between 2021 and 2030. The Tax Foundation’s conventional revenue estimate of Warren’s plan assumed it was enacted in 2020 and found that it raised $2.6 trillion over 10 years. And Lawrence H. Summers and Natasha Sarin estimated that the 2019 plan would generate much lower revenue of $25 billion per year.

Despite the colorful bill title, there wouldn’t be any mention of “ultra-millionaires” in the tax code even if the UMT passed; it would be merely the “wealth tax.” The UMT proposal includes ultra-millions in appropriations for the IRS. It appropriates $70 billion for enforcement, $10 billion for taxpayer services, and $20 billion for business systems modernization for each year between 2022 and 2032, but those amounts are not specific to implementation of the UMT.

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