Democrats find themselves in the desperate situation of scrambling for new ways to pay for President Biden’s social agenda now that Senator Kyrsten Sinema has ruled out all the tax hikes the rest of them support. Their solution involves creating a new tax on billionaire stock holdings.
The billionaire stock tax faces two enormous problems. First, several congressional Democrats are expressing open concern about the policy — and this is even before lobbyists go to work on them. And if the billionaire stock tax can’t pass Congress, anything like Biden’s plan is going to be dead, barring an unexpected face turn by Sinema. Second, even if it makes it through Congress, it is distinctly possible the Supreme Court will overturn this tax on constitutional grounds.
Sounds bad, right? Well, yes, it is. However, there is a potential bright side to this solution: The second problem might solve the first one.
Under current law, people who make money on stock only pay tax when the stock is sold at a profit. This allows very wealthy people to amass enormous gains on paper that do not have any tax burden — Jeff Bezos pays virtually nothing in taxes because he hasn’t sold his Amazon shares. However, in reality, Bezos is a very rich person who can borrow against the value of his stock holdings and enjoy a lavish lifestyle.
The billionaire stock tax plan would change this. Americans who have a net worth of more than $1 billion, or who have incomes of at least $100 million for three consecutive years, would pay capital gains taxes on the annual appreciation of their stock.
The idea wasn’t seriously considered as a part of Biden’s plan until late last week. However, Democrats are already expressing some reservations. Passing it is going to require forging a new party consensus very quickly and then holding it in the face of the inevitable lobbying campaign. So far, lobbyists have managed to weaken or kill a slew of highly popular and obviously necessary reforms, simply by picking off a handful of Democrats. Holding the line on the billionaire tax won’t be easy, given that, as Bernie Sanders has mentioned once or twice, the billionaire class exerts quite a bit of political influence.
The legal challenge is even more serious. In 1913, the Supreme Court, then controlled by right-wing judicial activists who interpreted the Constitution as forbidding any liberal economic or civil-rights law, struck down an income tax passed by Congress. In response, Congress passed the 16th Amendment to the Constitution, explicitly giving it “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
However, the amendment mentions income, not wealth. Those are separate things. The billionaire stock tax at least resembles a tax on wealth, which means one of the billionaires is going to bring a constitutional challenge.
The legal merits of this case appear to be debatable. If you want the case for why the tax is on income (and therefore constitutional), read Chuck Marr. To read the case for why it’s a tax on wealth (and therefore unconstitutional), read the Wall Street Journal editorial page.
I am not qualified to adjudicate this debate. Here’s what I do know. The Supreme Court has a 6-3 Republican majority, and five of those Republicans are extremely conservative. The case against the billionaire stock tax is far more plausible than the constitutional case against Obamacare, which already won the support of all the justices to the right of John Roberts. If conservatives bring them a legal challenge that isn’t so absurd that liberals break out in laughter at it, that challenge is probably going to succeed. That is to say, the chance that Brett Kavanaugh sees eye to eye with a liberal economist and not with the Journal editorial page seems remote.
The upside is that Democrats can turn this very likely legal defeat to their advantage. If billionaires complain to Democrats about the new tax, the Democrats can assure them Kavanaugh and friends will never let it take effect.
In the meantime, they can still count on the revenue from the tax to pay for the spending. If the Court strikes down the tax, the rest of the provisions can still remain in place. Senate budget rules merely require that any permanent increase in the deficit be paid for in the bill. It doesn’t matter if the pay-for is repealed later, either by Congress or by the courts.
And if any Democratic budget hawks are worried that they’ll be increasing the deficit by relying on a funding source that’s never going to take effect, they shouldn’t feel guilty. Biden’s plan is going to increase tax revenue by hundreds of billions of dollars through ramped-up funding of the IRS, and most of that money won’t be counted as a funding source, because congressional budget rules have an extremely silly rule preventing them from counting the proceeds of better enforcement.
Enacting a billionaire tax would be good policy. But even if the Court won’t allow it, you can use it as a paper savings to finance important social spending investments. And they can use the Court’s very likely intervention to paper over whatever substantive concerns Democrats develop. Sinema has put the Democrats in a difficult spot, but Kavanaugh can save them.