As you may have heard, the richest man in the world recently acquired Twitter for $44 billion. A few politicians, like Sens. Elizabeth Warren (D-MA) and Ron Wyden (D-OR) have opinions on that fact. Unfortunately, it’s the same opinion they have just about anytime anything at all happens of late — that it is proof of the need for a “Billionaire’s Minimum Income Tax,” as proposed by President Biden. In reality, all Elon Musk’s acquisition of Twitter proves is that administering such a tax would be monstrously complex and economically distortive.
The badly-named “Billionaire’s Minimum Income Tax” would apply to all households with a net worth above $100 million, and is in truth a wealth tax by another name. The tax base would include not just realized income, but the growth in value of non-liquid assets as well. Affected taxpayers would be required to pay at least 20 percent of the combination of the annual growth in both their realized and unrealized income.
Biden’s version, as well as other versions proposed by Senate Democrats, would apply not just going forwards, but retroactively as well. In other words, in the first year the tax went into effect, affected taxpayers would be expected to account for all unrealized gains up to that point.
Consider the implications for taxpayers whose wealth comes from shares of businesses formed in their lifetimes, such as Tesla, Facebook, or Amazon. All of that growth in wealth would be taxable under such proposals, and while these proposals generally allow the tax to be paid in installments, thousands of wealthy taxpayers would still be flooding the market with shares and vacuuming up loan and investment capital to pay their taxes.
For the Twitter deal, Musk reportedly used about $21 billion of his own cash — likely from his February sale of $22 billion in Tesla stock. For the rest, he borrowed $12.5 billion against his shares of Tesla stock, and the remainder against his new shares of Twitter stock.
While it isn’t possible to calculate tax liability under the “minimum tax” without seeing wealthy taxpayers returns going back years, subjecting Musk’s roughly 17 percent share of unsold Tesla stock alone to the 23.8 percent long-term capital gains tax rate, as the Senate proposal would have done, would create about a $37 billion tax bill for Musk — nearly twice as much cash as he had on hand to put towards the Twitter deal.
Musk’s strategy for acquiring Twitter is illustrative, however, of just how little of the wealthiest Americans’ assets are in liquid assets. If even the richest man in the world had to seek out financing for half of a purchase that represents a fraction of his net worth, one can imagine that other taxpayers affected by a “billionaire’s tax” would have to do the same.
In truth, it shouldn’t be surprising. Most Americans don’t have cash on hand to cover a purchase worth a large fraction of their net worth, especially if they own a home or substantial retirement account. After all, about 20 million Americans are “millionaires,” but that doesn’t mean most could pony up a million dollars tomorrow if they needed to.
None of this is to say that wealthy Americans Musk would be left penniless by a tax on unrealized gains. But for thousands of rich Americans to need to sell, or borrow against, assets to pay large tax bills would have ripple effects on interest rates and availability of investment capital. The Biden administration estimates that its proposal would raise $360 billion over a decade — a large portion of which would have to come from loans or share sales.
What’s more, such a tax would have a chilling effect on entrepreneurship. Not only would already-successful entrepreneurs be faced with the prospect of having to sell off ownership shares or borrow against assets that could bottom out in value tomorrow, but prospective entrepreneurs would take on this risk should their business become successful.
Any time progressive politicians see large amounts of money involved in a transaction, their first reaction is to think that they should be able to tax it. But taxpayers should know just how damaging of an instinct that is in this case.