Joe Biden campaigned as a champion of the everyday man. A big part of his campaign was targeted to improve the lives of everyday Americans. This meant things like improving healthcare access and eliminating student loan debt. At the same time, he promised to raise taxes on corporations and the wealthy. Now, this campaign promise is starting to take shape. Biden recently released a proposal that will increase taxes on households that earn over $100 million.
What Is The Billionaire Minimum Income Tax?
The Billionaire Minimum Income Tax is Joe Biden’s proposal to tax wealthy Americans’ full income at a minimum of 20%. Notably, this includes taxing unrealized capital gains from investments.
Unrealized capital gains are when an investment has increased in value but you have not sold it yet. For example, let’s say you buy $100,000 worth of Amazon stock. The stock price then increases 100%. The stock that you own is now worth $200,000 and you have earned an additional $100,000. However, this gain is “unrealized” until you sell it. Basically, if the stock is never sold then there is no associated tax liability.
Many wealthy Americans simply let their investments grow and compound over decades. They can make millions of dollars tax-free each year, as long as they don’t sell them. If they need money, they will simply borrow money against the value of their portfolio.
This is part of the reason why the rich get richer. It’s also why many billionaires pay less tax than teachers or firefighters.
Biden’s new proposal will tax these unrealized gains at 20%. In this sense, it would force billionaires to pay as they go just like everyone else. This tax will apply to the top one-one hundredth of one percent (0.01%) of American households. This means households worth over $100 million.
This new tax revenue will mainly go towards reducing the budget deficit.
What Does This Mean For Executive Compensation?
This new tax proposal could have massive implications for executive compensation. This is because the majority of American executives are compensated mainly in stock. If a CEO earns $30 million, it is common for only $2 million of this income to be paid in the form of a salary. The rest is given in stock options. This new tax proposal could cause executives to rethink this style of payment.
With that said, the highest income tax bracket still only owes 37% in federal income tax. This is nearly double the proposed 20% tax on unrealized gains. Due to this, it doesn’t make sense to shift executive compensation to salaried income.
In general, top executives have lots of flexibility in how they classify their income. For example, they could also choose to be compensated in “bonuses”. If this happens then it might result in a slightly different tax rate.
Alternatively, should this measure pass scrutiny from federal legislators, Billionaire Minimum Income Tax could result in no change to executive compensation – except for a larger federal income tax bill for America's top executives and wealthiest individuals.
