Sen. Ron Wyden (D-Ore.) is expected to unveil a proposal this week to help pay for President Biden’s budget, which has been whittled down to around $1.75 trillion. The plan appears to be gaining traction with moderate Democrats Sen. Kyrsten Sinema (D-Ariz.) and Sen. Joe Manchin (D-W.Va.), who objected to the original proposal to reverse tax cuts on those making more than $400,000 and raising taxes on corporations. Senate Republican leader Mitch McConnell spoke out against the proposed billionaire tax, saying, “The Democrats are so desperate to raise taxes that they are now proposing to tax money the American people haven’t even made yet.”

The billionaire tax would reportedly focus on individuals with $1 billion in assets or those with at least $100 million in income for three consecutive years. All told, fewer than 1,000 Americans might be affected, but House Democrats believe that over 10 years, it could bring in $200 billion to $250 billion in revenue. The proposal would likely create a one-time capital gains tax for the country’s wealthiest individuals—even if they didn’t sell assets like stock—based on the appreciation of an asset’s value between the start and end of the year.

These so-called unrealized earnings are one key reason the top 25 richest people in America have largely avoided income tax over the past two decades. In 2007, Jeff Bezos—at the time, the wealthiest person in the world—paid no federal income tax. The following year, Tesla founder Elon Musk, by then the second richest person in the world, also paid no tax, according to research published this summer by investigative news outlet ProPublica. 

Rather than cashing out stock assets and paying capital gains, billionaires tend to borrow against their stock holdings to fund lavish lifestyles. The single-digit interest rate on that borrowing is far lower than taxation, so in essence, the wealthy are deferring paying taxes until they sell, which could be five, 10, 50 years from now—or never.

“It’s one of the great tax-planning deferral and avoidance strategies,” says Christina Rice, director of the graduate tax program at Boston University School of Law. 

Talk of a wealth tax has been thrown around for some time. U.S. Sen. Elizabeth Warren (D-Mass.) proposed a broader wealth tax that would tax all of the holdings of America’s richest people, including boats, real estate, artwork, and jewels. But those assets are difficult to value, and such a proposal would require writing a new section of the internal revenue code as well as a new division of the Internal Revenue Service to enforce it—all of which takes time and resources, notes Rice.  

Plus, legal challenges could last for years, and the measure would probably prompt even more creative strategies by the wealthy to offshore assets to avoid taxation, she says. Wealth taxes in a number of European countries failed because they raised little money, and they were difficult to administer.

Unlike other wealth tax proposals, the new “billionaire unrealized gains” tax would focus on assets that are easier for the IRS to identify, value, enforce, and audit, says Rice. The Democratic plan also calls for an $80 billion, 10-year expansion of the IRS, which has largely been outgunned by the savvy attorneys and tax planning teams that the wealthy can afford to deploy. 

It’s still not clear what annual tax percentage billionaires would pay on the unrealized income, what happens if stock value declines, or if the rule would apply to non-U.S. assets. Judging by the wealth being generated by today’s billionaires, it would not be a small amount of money collected. Since the pandemic started, U.S. billionaires watched their wealth grow 70%, by $2.1 trillion. 

On Monday, Tesla crossed the $1 trillion mark in market capitalization, bringing CEO Elon Musk’s stake in the company to an estimated $232 billion—with a large portion of his shares pledged to secure his personal debts. He told the Wall Street Journal in 2016 that he planned to never sell his Tesla shares.

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