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Billionaire tax faces constitutional and political hurdles

WASHINGTON – The Democrats’ plan to tax billionaires has the party base excited. It might be appealing to Senator Kyrsten Sinema, D-Ariz. And that could be unconstitutional.

Party leaders scrambled to find other ways to foot some of the more than $ 1 trillion ‘Build Back Better’ bill because Sinema ruled out raising senior income tax rates income and business.

A proposal under development is a tax on the paper investment gains of the ultra-rich. The idea is to capture the income of billionaires whose assets – mostly stocks and real estate – appreciate $ 100 million annually without being taxed. Under current law, these gains are not “realized” and taxed until the underlying assets are sold.

An ally of Biden, Rep. Brendan Boyle, D-Pa., A member of the Tax Drafting Ways and Means Committee, worked on a version of the Wealth Tax with Senator Elizabeth Warren, D-Mass. He said in an interview on Tuesday that it is easy for the government to tax all income earned by workers, while the country’s richest investors can simply gain value by keeping investments untaxed.

“It ends up being very unfair,” he said, adding that he was convinced the plan would survive the constitutional rally.

Tax law experts disagree on whether such a provision is constitutionally compliant, but Daniel Hemel, a professor at the University of Chicago Law School, said Democrats would try their luck with a Conservative Supreme Court.

“This approach turns the Democrats’ plan to tax the wealthy into Brett Kavanaugh, and there are many constitutionally straightforward ways to tax the very wealthy,” Hemel said. “But it looks like Democrats are rallying around one of the approaches where there are genuine constitutional doubts.”

Because the policy has not yet been accepted – let alone written into legislation – it is impossible to know exactly how it will be worded. House Ways and Means Committee chair Richard Neal, D-Mass., Has yet to see the text of the proposal, according to Punchbowl News.

The question for tax drafters and party leaders is whether they can thread the political and constitutional needles into drafting the details.

Clear majorities of Americans prefer to tax the rich more. In a Morning Consult / Politico poll last month, 68% of registered voters said they supported raising taxes for the richest people. But few if any independent investigations look into the question of the taxation of unrealized earnings of billionaires.

Still, not all Democrats in Congress are convinced by the latest approach yet.

“It’s new, so implementation is becoming an issue,” said Sen. Jon Tester, D-Mont., Who added that he was not passing judgment one way or the other. “I really have to study it.

Senate Finance Committee Chairman Ron Wyden, D-Ore., Said he was confident the provision would survive legal challenges. As evidence, he cited lower court decisions in which the taxation of unrealized gains on futures contracts “has always been maintained”.

Legal scholars say that even if the courts were to rule in favor of taxing unrealized gains at their increased value – known as the “mark to market” valuation – it is unclear how they would approach the constitutionality of ‘a tax conditioned by the wealth of the taxpayer rather than on his income.

“There are plausible arguments on both sides,” said Andrew Hayashi, professor and director of the Center for Tax Law at the University of Virginia.

When the Constitution was ratified, it demanded that “direct taxes” be distributed among states “according to their respective numbers,” meaning that each state should pay an amount proportional to its population. The 16th Amendment created an exemption that allows the federal government to collect income taxes.

The fundamental questions for the courts are whether a federal tax can be based in part on wealth and whether paper gains on assets can be taxed as income before they are sold.

From a political standpoint, Democratic leaders may end up worrying more about whether they can pass the provision than whether it would survive a legal challenge. The billionaire tax cannot be declared unconstitutional unless it has first become law.

However, the possibility that a successful court challenge will add to the deficit could scare lawmakers who want to ensure that the “Build Back Better” measure remains deficit neutral. Biden touted his plan as cost-free, as his expenses would be offset by new income, and Sen. Joe Manchin, DW.Va., a landmark vote on comprehensive legislation, emphasized balancing the income and expenses.

Yet it is easier for Democratic leaders to count votes than to predict court decisions.

“I would give it a 50% chance,” said Hemel, who called the wealth tax “a good idea” in a Washington Post op-ed. “We have a lot of other options that have a 100 percent chance.”

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