To the Editor:
In a recent article,1 Marie Sapirie discussed some key aspects of the Ultra-Millionaire Tax Act of 2021 (S. 510), a bill proposed by Senate Finance Committee member and former presidential candidate Elizabeth Warren, D-Mass. If enacted, the law would generally impose an annual 2 percent wealth tax on the net value of a taxpayer’s total assets above $50 million and below $1 billion, and an annual 3 percent or 6 percent tax on the net value of a taxpayer’s assets in excess of $1 billion.
Two additional observations are worth noting.
First, a “taxpayer” subject to this wealth tax would be an individual, married couple, or trust other than one described in section 401(a) and section 501(a). A trust that is tax-exempt only under section 501(a) could still be subject to the wealth tax. In other words, tax-exempt pension trusts avoid the wealth tax, but charitable trusts would be subject to the wealth tax if they hold more than $50 million in assets.
It is unclear why charitable lead trusts, charitable remainder trusts, and other tax-exempt trusts with charitable purposes are targeted as ultra-millionaires that should pay the tax. The annual wealth tax would have a significant adverse effect on the nonprofit organizations that are beneficiaries of charitable trusts or are themselves organized as trusts in legal form. Proponents of the bill may not fully appreciate the different types of trusts under the tax code.
Second, the same thresholds of $50 million and $1 billion of assets would apply to a single individual or a married couple (whether filing jointly or separately). Two single individuals effectively lose half their combined exemptions if they are married.
For example, let’s assume that there are two individuals with the hypothetical names of “A-Rod” and “J-Lo,” who work in the sports and entertainment industries, respectively. A-Rod has $700 million worth of assets under the government’s valuation method, consisting of half real estate and other investments and half intangible assets such as his ability to generate endorsement income that is valued using the discounted cash flow method. Similarly, J-Lo used to have a little but now has $700 million worth of assets under the wealth tax regime, based on a valuation of her Louboutins and other designer outfits, rocks, and rights to royalty income from movies, English and Spanish language music albums, and reality TV shows.2
If A-Rod and J-Lo were married, they would have $1.4 billion worth of combined assets. The assets below the $50 million floor would be exempt from the wealth tax. The next $950 million of assets would be subject to a 2 percent wealth tax of $19 million per year. The remaining $400 million of assets would be subject to a wealth tax of up to 6 percent, or $24 million per year. The married couple’s annual wealth tax liability would be $43 million each year.
In contrast, if A-Rod and J-Lo were not married and did a multiyear engagement instead, each would have $50 million of exempt assets and $650 million of assets subject to a 2 percent wealth tax of $13 million each year. The two single individuals would collectively pay $26 million each year. That’s a savings of $17 million or 40 percent of their annual wealth tax bill, achieved by wisely postponing marriage.
There are similar marriage penalties in the $10,000 state and local tax deduction limitation and the home mortgage interest deduction limitation that are the same for a single individual or a married couple,3 but the social engineering against marriage in the wealth tax bill involves more substantial dollars. Although some may claim that love does not cost a thing and that marriage may have nontax benefits, the annual wealth tax can cost up to 6 percent of one’s tangible and intangible assets each year. Celebrities and other high-income individuals waiting for a wealth tax may be less likely to marry a fellow wealthy person from the block.
Sincerely,
Libin Zhang
Mar. 27, 2021
FOOTNOTES
1 Marie Sapirie, “She Has a Plan for That: Examining the Ultra-Millionaire Tax,” Tax Notes Federal, Mar. 29, 2021, p. 1981.
2 For examples of how the IRS may value celebrity likenesses and music rights, see Ben Sisario, “I.R.S. Says Prince’s Estate Worth Twice What Administrators Reported,” The New York Times, Jan. 4, 2021; Jeff Gottlieb, “Michael Jackson Estate Embroiled in Tax Fight With IRS,” Los Angeles Times, Feb. 7, 2014 (“Most of the dispute is over the value of Jackson’s image, along with his interest in a trust that includes the rights to some of his songs and most of the Beatles catalog, including ‘Yesterday,’ ‘Sgt. Pepper’s Lonely Hearts Club Band’ and ‘Get Back.’ The estate valued Jackson’s likeness at just $2,105. The IRS put it at $434.264 million.”).
3 See Libin Zhang, “Marriage and the 2017 Tax Reform Law,” Bloomberg DTR, Feb. 28, 2019.
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