The return of inflation has changed politics. For months the Federal Reserve and the White House dismissed inflation as the dog that had not barked in over 40 years. Inflation has now started to spiral out of control and the country may be on the brink of a recession.
Inflation is one of the main reasons why Biden faces record low poll numbers and Democrats may lose control of both the House of Representations and the Senate in the November mid-term elections.
The president’s political response has been to include a “Billionaire’s Minimum Income Tax” in his $5.79 trillion fiscal 2023 budget proposal. Despite the name, it would require that households with a net worth over $100 million (the top 0.001percent of U.S. households) pay a rate of at least 20 percent on their income as well as unrealized gains in the value of assets like stocks and bonds. The Biden Administration refers to the name of the proposal as a “billionaire minimum income tax” despite the $100 million threshold.
Attempting to impose a minimum tax rate of 20 percent on the likes of Jeff Bezos and Elon Musk may be good politics in an era when the prevailing wisdom is that the super-rich don’t pay their fair share of taxes, but this proposal is highly questionable from a governing standpoint. Essentially the proposal is taxing gains from their wealth.
It is beyond debate that the gap between the richest and the poorest Americans has widened in recent decades. According to the Pew Research Center, in 1970 upper income households had a 29 percent share of US aggregate income. By 2018 it was 48 percent. Middle income household income was 62 percent of the total in 1970, by 2018, it was 43 percent.
It gets even worse when you look at wealth inequality. The richest 1 percent of the population owns 56 percent of all US equities. The least wealthy 40 percent of the population owns no assets at
all—nada.
Rather than waiting for a taxpayer to sell an asset and tax those gains, the administration plan would allow the federal government to start collecting revenue now. The proposal raises complicated questions about how the IRS and taxpayers would assess the value of assets that are not publicly traded. It would be more efficient to simply tax the profits from sales of stock and other assets at the same rate as ordinary work income.
Another basic question is whether Biden’s proposal would raise the $361 billion over a decade that the White House says it would. Taxes based on capital gains coming from tradeable assets such as stock and bond prices are certainly more volatile than income earned by taxpayers. What are the assumptions about stock and bond prices over the next ten years that are behind the $361 billion projection and how do you value non-tradeable assets?
Broad-based taxes are more likely to deliver projected revenues than those that focus on a subset of the population. But Biden promised during the campaign that he would not raise taxes on anyone making less than $400,000 a year, effectively locking out 98.2 percent of taxpayers from any proposed tax increase.
Like the COVID-19 pandemic, Russia’s war in Ukraine has contributed to stagflation pressures in the United States and other advanced economies where prices are increasing beyond what many ordinary people can afford.
Global food prices set a record last month according to the United Nations. People are on edge. The only certainty when people go food shopping these days is the price will be cheaper today than tomorrow.
Inflation is a very real problem, but Biden’s political response of proposing a minimum income tax on the ultra-wealthy doesn’t address it. Instead, it is all about political virtue signaling.
