The Biden budget has just been released and President Biden wants to “raise some taxes.” In recent speeches, Biden has said that tax increases should focus on the wealthiest taxpayers — an approach that some states have adopted or recently proposed. So, while you’re worrying about the 2023 tax deadline and trying to pay as little tax as possible, the wealth tax debate is heating up again…should billionaires and millionaires pay more?
Biden Budget: Biden Billionaire Tax
Whichever side of the wealth tax debate you’re on, it is good to know what a wealth tax is, and how Biden’s proposed “billionaire minimum tax” would work.
Wealth taxes are generally based on a person’s net worth, or on the market value of a person’s assets. So, wealth taxes aren’t merely about the amount of income that a person has in a given year. Part of the reason for that is that the very wealthy usually grow their wealth through investments, which are taxed at a lower rate than earned income. Earned income (which includes wages and salaries) is typically the main source of money for lower-and-middle- income taxpayers.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The billionaire tax in Biden’s budget proposal would be a minimum of 25% for households with net worth exceeding $100 million. For comparison, the wealthiest taxpayers in America reportedly pay an average 8% tax rate, so President Biden is essentially proposing about a 17% tax increase for the wealthiest taxpayers.
“The minimum tax would make sure that the wealthiest Americans no longer pay a tax rate lower than teachers and firefighters,” Biden said of the tax proposal during his State of the Union speech to Congress earlier this year.
The Biden budget also proposes raising the Medicare tax rate on people making over $400,000 a year to help shore up Medicare, and doubling the capital gains tax rate on wealthy investors. Biden pledges that his administration won’t raise taxes on people making less than $400,000 a year.
How Much Tax Do the Wealthiest Americans Pay?
Federal data show that so-called “working people” pay about ninety-nine percent of the taxes they owe on income that comes from wages and salaries.
On the other hand, the wealthiest taxpayers are able to shield a portion of their income (about 20% according to the White House) from tax, so that their average tax rate ends up being quite low relative to their wealth. The top one percent also pay a much lower tax rate relative to what lower-and-middle-income taxpayers pay.
For example, in 2021, a ProPublica report indicated that the richest twenty-five Americans had an effective zero percent tax rate. When the ProPublica analysis was first released, it generated controversy over confidentiality of taxpayer information. But the data made some people aware of how the very wealthy can sometimes avoid paying federal taxes.
So, why does all of this matter? Well, there’s a wealth distribution gap in America. In the past few years, the top one percent has owned about thirty percent of the country’s wealth, while the bottom fifty percent typically owns just a little over three percent of the nation’s wealth.
State Wealth Tax Proposals
With wealth inequality in mind, some states have wealth taxes in place while other state lawmakers are proposing to “tax the rich.”
What is the Massachusetts Millionaire's Tax? For example, beginning this year, due to a change in the state constitution approved by voters, Massachusetts now has a "millionaires tax." Bay Staters with taxable income that exceeds one million dollars are expected to pay 4% more in Massachusetts income tax. Massachusetts recently returned billions in excess revenue to eligible residents through 62F tax refunds.
Additionally, lawmakers in California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington have recently proposed wealth taxes.
- The Washington state proposal would tax residents with at least $250 million in net worth with a 1% tax on asset values above that net worth threshold. (Washington is a state that doesn’t have income taxes).
- Hawaii’s Wealth Asset Tax would apply to taxpayers with assets over $20 million in assets in Hawaii. The tax would be 1% of net worth per year. The bill, (also known as Senate Bill 925), recently advanced from the state’s senate committee.
- The latest wealth tax proposal in California would impose a 1% tax on the wealthiest Californians (i.e., those with net worth of $50 million or more). California billionaires would be subject to a 1.5% tax. (A recent effort in California to tax the rich to help subsidize electric vehicles failed in the state’s 2022 midterm elections and Gov. Gavin Newsom opposes the current wealth tax proposal).
- Illinois lawmakers proposed a wealth tax where asset gains would be recognized yearly as income and subject to a flat rate tax of 4.95%. Illinois is a state where residents pay a flat tax, and it has been reported that if adopted, the wealth tax proposal could raise about $510 million in revenue in its first year.
- “Wealth tax” bills in New York and Connecticut would focus in part on increasing state tax rates for capital gains, and dividend and interest income.
It’s hard to say if any of these state wealth tax proposals could become law. That’s partly because while surveys show that many Americans support wealth taxes, some people don’t support “taxing the rich.” There are also lingering questions about whether wealth taxes are a "fair," legal, or effective way to address the wealth gap.
Bottom Line: What to Do About Wealth Tax
For many reasons, President Biden’s billionaire minimum tax proposal won’t gain meaningful traction on Capitol Hill. Still, it’s always good to keep in mind that U.S. tax law allows you to take full advantage of legitimate tax breaks that you are eligible for. (If you’re among the wealthiest taxpayers, you are most likely already working with your financial and tax advisors on ways to continue reducing your tax liability).
- But whether "wealthy" or not, if you feel like you might be paying more taxes than you have to, consider working with a professional tax preparer or advisor. You could be overlooking potential tax deductions, credits, and exemptions that could lower your tax liability.
- And if you’re looking for free tax filing help, various community sites throughout the country offer free tax preparation assistance.
-
-
Controversial Capital Gains Tax Upheld in Washington
The state’s historic long term capital gains tax is projected to bring in $1 billion over the next two years.
-
Protect Your Retirement: Seven Things You Can Do Right Now
Whether you’re preparing to retire or already retired, a proactive plan is critical to help safeguard your retirement, especially amid uncertainty.
-
IRS Tax Deadline Extended for Some New Yorkers
Some taxpayers in New York now have more time to file their federal tax returns since the IRS extended the tax deadline.
-
Lawmakers Propose Tax Hikes to Combat Climate Change
Climate change is prompting some lawmakers to propose property tax hikes to fund mitigation efforts while scientists say that global warming could reach a critical level in less than a decade.
-
Etsy, eBay, PayPal Want IRS 1099-K Relief for Online Sellers
Companies like ebay, Etsy, and PayPal want Congress to raise the new $600 reporting threshold for IRS Form1099-K to give relief to millions of sellers who use their sites.
-
Is Your First RMD Due April 1?
An important required minimum distribution (RMD) deadline for some retirees is just around the corner.
-
Biden Calls for Doubling of Capital Gains Tax Rate
President Biden wants to increase the capital gains tax rate and the Medicare tax rate to have wealthy people pay a “fairer” share of taxes.
-
Pink Tax: What Does Price Discrimination Cost Women?
Women's History month is a good time to revisit the “pink tax”—a form of price discrimination that’s banned in many states but costs women millions of dollars each year.
-
Tax Day 2023: When Is the Last Day to File Your Taxes?
tax deadline Tax Day for most of us is April 18. This is when Federal income tax returns are due. But some people have some extra time to file. Are you one of them?
-
Income Tax Brackets for 2023 Are Set
Although the federal tax rates didn't change, the tax bracket income ranges for the 2023 tax year are adjusted to account for inflation.
