Democrats have been bickering amongst themselves in Congress for months over a social safety net spending bill expected to cost $1.75 trillion, the largest influx of social spending since the 1960s. That hold-up has been largely caused by moderate Democrats. These lawmakers argued that, amongst other things, a billionaire's tax initially included in the bill would have unfairly targeted wage creators.
Now, instead of that billionaires tax, Democrats hope that a surtax on individuals making more than $10 million annually will be enough to cover the cost of the proposed bill. However, experts report that finding loopholes in the law will be straightforward and that some of the ultra-rich are already planning to avoid the tax.
The surtax would be set at 5% for those making $10 million, and 3% for those making more than $25 million in income, annually.
The bill was initially meant to be funded by a now-defeated billionaires tax on unrealized shares gains. The tax sparked heated debate across the political sphere, despite the fact that it would have affected fewer than 800 people, just those earning more than $100 million for three years in a row. At the peak of the debate, Elon Musk sold off $6.9 billion in Tesla Inc (NASDAQ: TSLA) stock in preparation to dodge the tax.
According to finance experts like Comerica Bank's national director of wealth planning, Lisa Featherngill, the billionaires tax "would have been very difficult to avoid." Assets or income would need to be cut in half in order for earners to avoid the levy.
"If you have a billion in assets, getting to $500 million is not easy," Featherngill said.
Experts say that the new surtax, in comparison, should be easy for most earners to avoid paying. Wealthy people who successfully avoid the proposed levy could reduce their projected tax burden from 31.8% to 23.8%.
"The goal is to get your modified adjusted gross income below the threshold and the tax does not apply," Alvina Lo, chief wealth strategist at Wilmington Trust, told Reuters.
Some wealthy individuals are already planning to reduce their personal income to below the $10 million threshold using pass-through tax structures, C corporations, or S corporations. Each of these methods will allow individuals to reduce their personal income, but the earning would still face corporate taxes as business income.
The White House projects that the newly proposed surtax could bring in $230 billion, but experts say this probably isn't accurate given the likelihood that earners will attempt to avoid the tax.
According to Reuters, lawmakers have neither acknowledged nor denied the potential loopholes. While the exact details of the bill have not yet been decided, experts predict a surtax of up to 8% will be included, but a billionaires tax will not be.
The tax is unlikely to be included in the bill, but some Democrats remain hopeful that it will be passed in other legislation. The author of the proposed billionaires tax, U.S. Senate Finance Committee Chairman Ron Wyden, told reporters that he hopes this tax will be used to fund climate initiatives and social safety nets.
"There are economic experts saying that if you want to make sure you raise the revenue, go with the billionaires income tax," Wyden said.
Recently, Congress passed a $1 trillion bill aimed to fund infrastructure. However, by the time the bill passed, the second most costly piece was a tax cut for the top 10% of earners.