Explanation: Democratic Billionaire Tax Proposal May Face Legal Challenges

Oct. 27 (Reuters) – The U.S. Senate Democrats ‘proposal to tax billionaires’ marketable assets to help fund President Joe Biden’s social spending program will almost certainly be prosecuted, tax experts have said.

White House press secretary Jen Psaki said Wednesday that Biden supports the so-called “billionaire tax” and considers it legal.

The following explains how the proposal could be challenged and how supporters could defend it.


A central question is whether the US Constitution gives Congress the power to tax wealth. The tax would impose a tax rate of 23.8% on long-term capital gains on marketable assets, whether or not they have been sold. Opponents are likely to argue that unrealized gains are not income and cannot legally be taxed.

The Constitution requires that federal “direct taxes” – which are taxes levied on the people who pay them, rather than on goods and services – must be “allocated” among states.

This means that each state must pay an equal amount per capita, in the same way that seats are allocated in the House of Representatives. This would be impractical in the case of a tax on billionaires since the ultra-rich are heavily concentrated in states like New York and California.

The 16th Amendment to the Constitution, ratified in 1913, created an exception allowing the imposition of federal income taxes without apportionment. There is no similar exemption for wealth. Opponents of the billionaire tax will likely use this to support the claim that the government cannot implement a wealth tax that is not split evenly among states.

“Taxing unrealized capital gains is not taxing income,” said David Rivkin, partner at the Washington law firm Baker & Hostetler.

He cited a 1955 case in which the Supreme Court defined income as “wealth, clearly realized, and over which taxpayers have full control.”


Any billionaire under the law would have grounds to sue Janet Yellen in her official capacity as Secretary of the Treasury to challenge the constitutionality of the tax, Rivkin said.

Experts say it could take around a year for the legal challenges to reach the appeal process.

A potential claimant may have to wait until the tax is actually due to bring an action, but if the bill contains an immediate record-keeping requirement, a challenge could arise sooner, he added.

“Constitutionality would be challenged immediately, and challenged by people with a lot of money to pay very powerful lawyers,” said Erik Jensen, professor emeritus of law at Case Western Reserve University in Cleveland, Ohio.

Any constitutional challenge could be decided by the Supreme Court, where the conservative justices hold a 6-3 majority.


Supporters could argue that similar laws are already in force.

Senate Finance Committee Chairman Ron Wyden, an Oregon Democrat who drafted the proposal, told reporters on Wednesday that the tax was a “legal” remedy for a “glaring loophole.”

In support of the proposal, Wyden noted that there is a provision in the U.S. tax code that allows some taxpayers to treat unrealized capital gains as income even if they have not sold the securities under- underlying.

In addition, the U.S. government is already taxing certain accrued gains, including debt transactions and passive income earned by U.S. residents from foreign companies, according to a 2019 article co-authored by David Kamin, now tax policy adviser at the White House.


The Supreme Court maintained special taxes against the wealthy long before the 16th Amendment, which may strengthen supporters’ argument that a tax on billionaires is constitutional.

Bruce Ackerman, a professor at Yale Law School, pointed to a 1796 court ruling that a tax on horse-drawn carriages, then considered a luxury, was permitted without apportionment among states.

Having a car at the end of the 18th century, Ackerman said, “was the equivalent of [being] a billionaire. “

More recently, a Washington state couple represented by Rivkin challenged the constitutionality of a provision in the 2017 tax reform law known as the mandatory repatriation tax. The provision taxes citizens’ income from investments in foreign companies even if they have not received dividends.

This case is on appeal to the United States Court of Appeals for the Ninth Circuit.

Reporting by Luc Cohen in New York Additional reporting by Trevor Hunnicutt and Richard Cowan in Washington; Editing by Noeleen Walder and Alistair Bell

Our Standards: Thomson Reuters Trust Principles.

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