Proposed Tax on Billionaires Raises Question: What’s Income?

ProPublica, the nonprofit news organization, obtained the tax returns of many ultra-wealthy people, and reported that, among other extraordinary examples, the Amazon founder Jeff Bezos saw his wealth rise by $99 billion from 2014 to 2018, while he paid $973 million in taxes in that span — less than 1 percent.

The Wyden plan would require the very wealthy — those with over $1 billion in assets or three straight years of income over $100 million — to pay taxes based on unrealized gains. At that tier of wealth, the logic goes, the usual considerations arguing against a so-called “mark-to-market” capital gains tax don’t apply. Those are sophisticated taxpayers with access to loans or other source of liquidity, for example, who hold assets that for the most part can reasonably be valued annually.

It could create some very large tax bills for that small sliver of Americans. If a family’s $10 billion net worth rose to $11 billion in a single year, a capital-gains rate of 20 percent would imply a $200 million tax bill.

And by applying the new tax system only to a few hundred families that are very wealthy, Democrats are betting that they will not cause excessive hassles to millions of moderately wealthy Americans. Put differently, it’s one thing to insist Mr. Bezos pay tax on his unrealized billions of dollars in Amazon gains every year, but another to insist all small-town dentists estimate what their practice is worth and write a check to the I.R.S. if it has become more valuable.

Still, having a cutoff at which the new capital gains system applies could create perverse incentives, too.

“If you have a threshold, you’re giving people a really strong incentive to rearrange their affairs to keep their income and wealth below the threshold,” said Leonard Burman, institute fellow at the Tax Policy Center. “People might do things to keep their income just below the threshold that could be really inefficient.”

It also “complicates the administration’s efforts to improve compliance among high-income people, who are the people most able to control what shows up on their tax return and what doesn’t,” he said.