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In the Biden bill, the billionaires beat the working rich

The most striking thing about the tax provisions that made it into the framework President Joe Biden announced Thursday is how they preserve the ability of business owners to accumulate vast fortunes with minimal taxation — while extracting more money from the highest-paid people those owners employ.

By: New York Times |
October 29, 2021 2:48:33 pm
NFL Commissioner Roger Goodell, left, and New England Patriots owner Robert Kraft in Miami Gardens, Fla. on Feb. 2, 2020. Wealthy people like Goodell may not fare as well as super-wealthy NFL owners like Kraft come tax time. (The New York Times)

Written by Neil Irwin

In the end, it was the millionaires versus the billionaires. The millionaires lost.

Months of wrangling over how to offset the cost of the Biden administration’s signature social spending bill appeared to culminate in a chaotic Wednesday on Capitol Hill, as hugely consequential tax and spending provisions were either included in the final deal or left out.

The most striking thing about the tax provisions that made it into the framework President Joe Biden announced Thursday is how they preserve the ability of business owners to accumulate vast fortunes with minimal taxation — while extracting more money from the highest-paid people those owners employ. These “working rich,” as investor Clifford Asness has called them, would pay much of the bill for an expanded social welfare system.

Amazon founder Jeff Bezos, who is worth nearly $200 billion, would see little change in his highly favorable tax situation. Andrew Jassy, who succeeded Bezos as CEO and received about $36 million in compensation in 2020, is likely to owe more in taxes if the Democrats’ framework becomes law.

The billionaire owners of NFL teams did fine. NFL Commissioner Roger Goodell, said to be paid $40 million a year, will owe a lot more in taxes, as will the 162 NFL players who are set to be paid more than $10 million this year.

In the realm of fiction, fans of “Succession” can rest assured that the depraved scions of the media-conglomerate-owning Roy family will enjoy their wealth with little interference from the tax man. The highly compensated help — like the chief financial officer, Karl — will be paying more.

That is the simple conclusion to draw from the list of what is and isn’t in the compromise deal after it made it through marathon negotiations.

The deal includes a new surtax of 5 percentage points on income above $10 million and an additional 3 percentage points on income above $25 million. So a CEO who makes $30 million would owe an additional $1.15 million in federal income tax over current law.

That could prove particularly meaningful for people who have a windfall income in one year or a handful of years. A lottery winner, or even a professional athlete or actor with only a few very high-earning years, would qualify. Earning $50 million in a single year would entail a considerably higher tax burden than $10 million a year for five years straight. The surtax could, among other things, create more incentive for employers to offer deferred compensation arrangements to their highest-paid workers.

Meanwhile, the owners of a company would continue to be able to accrue wealth as it became more valuable over time and would owe tax on gains only if they chose to sell shares. The Democrats’ framework does not include any of several provisions that would have targeted those pools of wealth.

Most prominently, in recent days, Democrats were seriously considering what they branded a “billionaires tax,” which would have required Americans with $1-billion-plus fortunes to pay capital gains tax on assets as their value rose, not just when those assets were sold.

The billionaires tax would have affected some 700 families, whereas 22,000 tax returns in 2018 reported income over $10 million, the threshold at which the surtax would apply.

But senators including Joe Manchin, D-W.Va., rejected the idea Wednesday, and it was scrapped in the final negotiating push. In truth, it was only the last in a series of proposals targeting dynastic wealth that did not make it into the agreement.

That includes eliminating “stepped-up basis.” At present, a person can accumulate assets over the years without paying tax on them then pass them along to heirs whose cost basis is reset at their higher valuation. It is a mechanism by which large fortunes can be built and passed through the generations without much payment in taxes.

President Joe Biden had proposed taxing unrealized capital gains of over $1 million at the time of a person’s death, a provision that did not make it into this week’s agreement. He also proposed raising the capital gains tax rate for those with more than $1 million in gains. Neither is part of the tentative deal.

The same can be said of eliminating the carried interest loophole, which allows private equity executives and others who manage investments to, in effect, treat earnings as low-tax capital gains rather than as higher-taxed income.

The tax code favors investment income over wage income in a variety of ways, most notably the 20% tax rate on long-term capital gains that is far below the 37% top income tax rate.

The logic is that this incentivizes investments that strengthen long-term economic potential — that the tax code should give people reasons to put capital at risk in order to grow the size of the economic pie. But one result is that top wage earners face higher tax rates and less ability to delay or avoid taxes altogether than those who make more money from investments.

It shouldn’t be too surprising then that successful high earners aim to turn small fortunes made from their labor into large fortunes tied up in capital. You see it in business ventures owned by media stars such as Oprah Winfrey and Tyler Perry, and athletes like LeBron James and Tom Brady.

The age-old tension between labor and capital might not have the same feel when the laborers in question are richer than most people could ever dream. But the past few days on Capitol Hill suggest that in a political battle between the working rich and the truly wealthy, the wealthy have the political juice.

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