Facing unfavorable economic trends, congressional inertia, and collapsing approval for the Biden administration, Democrats are getting desperate. Tensions within the party have stalled the reconciliation bill on which they've placed longstanding aspirations for new social programs and environmental regulation. Now, reality seems to be setting in: The party needs to pass something if it hopes to avoid a wipeout in the midterm elections next year.
Senate Democrats took a step toward that outcome early this week when they agreed to fund some of the proposed spending with a new tax on billionaires. As with the rest of the bill, the details remain vague, but the idea is to tax "unrealized gains" — in essence, the appreciated value of property that hasn't been sold — of people who own more than $1 billion in assets or report income above $100 million for three consecutive years.
The short-term politics seem favorable. The very rich aren't especially popular with the public (although a majority regard them with indifference), and the plan is apparently acceptable to Sen. Krysten Sinema (D-Ariz.), who ruled out increases in standard marginal income tax rates. While raising any taxes probably isn't an optimal strategy before an election, squeezing about 700 billionaires is a fairly safe bet.
For just that reason, though, the billionaire tax is more legislative gimmick than serious proposal. For one thing, it's not clear that it's legal because of a constitutional requirement of proportionality among the states for taxes, like this one, collected directly from citizens. The 16th Amendment makes an exception for income taxes. But are unrealized gains income? No money can be collected until the courts answer.
Second, the structure of the proposal makes it unlikely to go into effect as planned. In the current version, billionaires would have up to five years to pay the first installment. Since Republicans are likely to take control of Congress or even the White House during that time, there's a high probability this assessment would be reduced or eliminated before it ever came due. Billionaires can easily wait out the clock.
Last and most important, though: Taxing the rich is fiscally irrelevant. As my George Washington University colleague Kimberly Morgan has pointed out, "No large welfare state is funded solely through taxes on the rich and corporations. The middle class is where the money is."
According to reports, Democrats hope the tax could eventually be extended downward from billionaires to mere millionaires. But even that won't cover the bills for the spending they want. There simply aren't enough rich people, and you can't have European-style benefits without European-style taxes on people who aren't rich by any reasonable definition. That's a dilemma Democrats don't want to face.