By Bill Martin
Former FRC business instructor
The Biden White House has announced a “Billionaire Minimum Income Tax” (BMIT) as part of the fiscal year 2023 federal budget. This proposal will be misquoted, misunderstood, and will surely put some political panties in a twist. And it will likely be a campaign issue ahead of the 2022 mid-term elections. Let’s try for some accuracy ahead of this likely battle.
This nation has had an AMT (Alternative Minimum Tax) going back to 1969. Support for its passage came from congressional testimony by a Secretary of the Treasury that 155 tax filers in 1967 with adjusted gross income above $200,000 had paid no tax at all. Inflation adjusted, those 1967 incomes would now be $1.17 million. The AMT was intended as a minimum tax, and as various deductions, deferments and loopholes have been closed since, it is affecting far more people than at its implementation. As of tax year 2018, the AMT affected 0.1% of filers, mostly in the higher tax brackets.
There’s also stark comments out there referring to historical “Eisenhower-Era Tax Rates of 90%.” Those who are confused and those who are opposed to taxation altogether will often leave the impression that during the 1950s, the government took 90% of one’s income, leaving you with only 10% for your household. It’s a potent misconception when in the wrong hands. The 90% is a rate of taxation on the top incremental bracket of income—not all income. And in the days when it existed, there were a truckload of “write-offs” that resulted in very few with high income reaching that high rate.
The BMIT is an attempt to establish a 20% AMT on annual household income above $100 million, and the projection is that more than half the revenue from this measure would come from those with yearly income exceeding $1 billion. Likely to be missed is that those households already paying 20% would pay nothing additional. Those who file returns that otherwise qualified to pay less than 20% would owe a “topping-up” payment to reach the BMIT’s minimum requirement.
Income inequality and tax fairness are being discussed more often these days than just during election campaigns. While many struggle, strategize, and contribute to tax sheltered investments that must be taxed beginning at age 70.5, the super wealthy are able to use the tax code to avoid lots of taxation. This can result in passing millions and billions on to their descendants who inherit at a “stepped-up basis” and therefore can only be taxed on the gains from such transfers.
Voices opposed to inheritance taxes have creatively coined the term for them as a “Death Tax,” to draw attention to the claim that it is obviously unfair to tax the dead. If I face mandatory withdrawals from my IRA at age 70.5 so the government can tax me after previously sheltering me for many years—why don’t the super wealthy face something similar?
It’s common for us to imagine or observe those more well-off than ourselves and wonder, “Are they working as hard or diligently as I am?” Though we might be comforted by the thought that great wealth does not automatically guarantee health or happiness, we must also understand that our ship won’t magically come in, someday, somehow.
One of the best quoted statements about taxation and citizen responsibility came in 1934 from New York’s appellate justice Learned Hand (1872-1961). “A taxpayer may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
It is important to recall that the U.S. never imposed a permanent federal income tax until 1913, and we should understand that self-interest is neither a crime nor unpatriotic. But it should also be remembered that for businesses and corporations, every expense is deductible to offset income, and many investments to improve a business get beneficial tax treatment. Common wage earners can’t rely on this. They used to be able to deduct credit card interest but that ended in the 1980s.
Tax fairness, the BMIT, and U.S. Treasury revenue will likely be an item in the coming election. Revenue from taxes provides for national defense, a consistent judicial system, consumer protection, airports, ambulance and hospital readiness, police services, fire departments, road and highway safety, and a variety of other services that protect our high living standards. Hopefully, when future howls fill the media with objections to the BMIT, more of us will be able to understand and trace the benefits we collectively receive. “Death and taxes” is a well-worn phrase. The first one cannot be avoided. The second one shouldn’t be either.