The Biden administration released its $7.3 trillion FY25 budget, and President Biden is again proposing as he did last year, to levy higher taxes on billionaires. During his State of the Union address early this year, Biden emphasized the need to raise taxes on the wealthiest taxpayers, an approach that some states have also already adopted or proposed.
So, while most people are trying to owe the IRS as little as possible, the wealth tax debate is heating up again. Are billionaires and millionaires paying their “fair share”?
Biden tax hikes for billionaires
President Biden's budget proposal includes a billionaire tax that would apply to households with a net worth of over $100 million. The proposed tax rate would be at least 25%, a notable increase for the wealthiest taxpayers who reportedly pay an average tax rate of 8.2%.
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“No billionaire should pay a lower tax rate than a teacher, a sanitation worker, a nurse! That’s why I’ve proposed a minimum tax of 25% for billionaires,” Biden said of the tax proposal during his March 7 SOTU address.
- Biden says there are 1,000 billionaires in the U.S., and the 25% tax would raise $500 Billion over the next ten years.
- The Biden administration has pledged not to raise taxes on those making less than $400,000 a year.
Biden reiterated that pledge during the State of the Union, saying, "Under my plan, nobody earning less than $400,000 will pay an additional penny in federal taxes.”
President Biden's budget proposal also includes tax increases designed to have the wealthy pay their "fair share" including higher capital gains tax rates, as well as other provisions targeting fuel for private jets, and corporate tax breaks for executive compensation.
How much tax do the wealthy pay?
The wealthiest taxpayers can shield a portion of their income (about 20%, according to the White House) from tax, so their average tax rate is relatively low relative to their wealth. The top one percent also pay a much lower tax rate than taxpayers with lower and middle incomes.
One of the reasons why wealthy individuals pay less in taxes is because they often accumulate their wealth through investments, which are taxed at a lower rate than earned income. Earned income, such as wages and salaries, is typically the main source of money for taxpayers with lower and middle incomes. This means that those who primarily earn income from wages and salaries bear a heavier tax burden compared to their income.
These disparities contribute to America's wealth gap. 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 over three percent.
Capital gains taxes and wealth tax proposals
With wealth inequality in mind, some states have wealth taxes while others propose to “tax the rich.”
Massachusetts: Due to a change in the state constitution approved by voters, Massachusetts has a "millionaire tax." Bay Staters with taxable incomes exceeding one million dollars pay 4% more in income tax to the Commonwealth.
Washington: Washington state does not impose a personal income tax. However, the state recently implemented a capital gains tax that has stirred controversy. The tax, which is 7% on the sale or exchange of long-term capital assets, was upheld by the Washington Supreme Court. However, as Kiplinger has reported, the tax may be put on the state's ballot in November for possible voter repeal.
Additionally, lawmakers in Hawaii, Connecticut, Illinois, Maryland, New York, and Oregon have proposed wealth taxes. Some of those are highlighted here.
- Hawaii’s proposed Wealth Asset Tax would apply to taxpayers with over $20 million in assets in Hawaii. The proposed tax would be 1% of net worth per year.
- California's latest wealth tax proposal would impose a 1% tax on the wealthiest Californians (i.e., those with a net worth of $50 million or more). California billionaires would be subject to a 1.5% tax.
- 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%. 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 partly on increasing state tax rates for capital gains and dividend and interest income.
Note: While some surveys show many Americans support wealth taxes, some 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.
Biden wealth tax: Bottom line
Due to the significant political differences in Congress, President Biden's proposal for a minimum tax on billionaires won't make progress on Capitol Hill this year.
Still, it's crucial to remember that U.S. tax laws provide legitimate tax breaks that you can take full advantage of if you qualify. (If you're a wealthy taxpayer, you're likely already collaborating with your financial and tax advisors to identify ways to keep reducing your tax obligations.)
- Whether "wealthy" or not, consider working with a professional tax preparer or advisor if you feel you might be paying more taxes than you must. You could overlook potential tax deductions, credits, and exemptions that could lower your tax liability.
- If you’re looking for free tax filing help, various community sites nationwide offer it, depending on your income.
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