Happy Wednesday from Los Angeles.

Today, I'm back with a closer, hopefully sober look at the plan to tax people like Elon Musk and Jeff Bezos to smithereens. It looks, as of this writing, that the proposal is dying a slow death. But Democrats clearly have gazillionaires like them in the cross-hairs. And while it is quite possible that the billionaires tax will not survive this round of Washington wrangling, you should think of this as but the first front in a years-long war to come against the ultra-rich. And so I wondered: What is the wealth defense industry going to do about it?

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Will Billionaires Really Get Taxed to Smithereens?

In a short time, a seemingly quixotic billionaire tax has become a credible threat to enter Biden’s multi-trillion social spending plan. Is this all liberal pie-in-the-sky fantasy? Or the beginning of a new cri de coeur for the wealthiest Americans, and those who manage their money?

Way back in 2018, in the earliest days of the Democrats’ so-called invisible primary, Joe Biden candidly pitched himself as the type of pro-success Democrat who wouldn’t demonize the wealthy. “I don’t think 500 billionaires are the reason we’re in trouble,” Biden said in a speech that year, drawing a distinction between himself and Bernie Sanders. And yet a presidential campaign later, 18 months after wealth tax proponents like Bernie and Elizabeth Warren petered out of the Democratic primary, those billionaires are firmly ensconced in the Biden barrel. A proposal to tax the hell out of them in the most controversial manner has abruptly become a credible proposal in an exhausted Washington, borne less out of an ideological commitment from Biden than from a frenzied, deadline-fueled panic to find $2 trillion in revenue that a single senator won’t deep-six. 

The “billionaire income tax” may have emerged overnight, but it’s all too easy to see how we arrived at this consensus: Billionaires are growing increasingly unpopular with both the populist left and the populist right, fueled by the sense that the economic system is rigged, and became even more rigged during the pandemic. If you’ve got to pick the pocket of someone, there are few easier targets than a group comprising about 700 people, as powerful as they may be.

The complex proposal, which would levy an annual tax on their unsold publicly-traded assets, would be a radical transformation of the American tax regime. Under the current system, billionaires can effectively defer taxation until after their deaths, and even beyond it, borrowing against their holdings rather than selling assets. The billionaire tax would eliminate that strategy by imposing a one-time tax at the capital gains rate, 23.8 percent, on the lifetime growth of their assets. For company founders like Elon Musk, who typically acquire shares at a near-zero cost basis, the tax bill would be astronomical. In subsequent years, affected taxpayers would pay more when their wealth goes up, or claim a deduction going forward if it goes down.

There are myriad challenges at this point. The political: Are there 218 votes for this in the House, let alone 50 votes in the Senate? The constitutional: Is it even legal? The logistical: How would the tax be effectively enforced? But even if the proposal flames out by the time the next news cycle rolls around, you get the feeling that this will not be the last time Democrats consider more creative ways to tax the likes of Jeff Bezos.

This is our new politics. And yet it goes without saying that America’s wealthiest are crafty, determined, and highly incentivized to not take this on the chin. So I am less interested in whether this is good policy, and more interested in the second-order effects—how the law, if passed, would affect the billionaire class that controls more than $5 trillion in assets. If their highly-paid wealth managers, accountants and estate planners have their way, not surprisingly, those effects would be de minimus.

Wealth managers like to recite an axiom that the ultra-wealthy only have three options for what to do with their billions that they can’t spend before they die: Give it to the kids, give it to charity, or give it to the government. But as anyone in the asset-preservation industry knows, that’s only half the story.

For starters, we don’t really know precisely how many people the current proposal from Senate finance chair Ron Wyden would affect, or how hard the thumping would be; insiders know that the Bloomberg Billionaires Index and Forbes lists undercount assets, sometimes substantially. That’s in part why there is such a wide range in estimates for how much this proposal would actually raise over ten years. Is it $200 billion? $500 billion? It’s unclear, especially because we don’t know what these companies will be trading at in the future. We do know, however, that there are few tax reforms that would hit a smaller, more concentrated group of people. (For all their calls to soak the rich, the Sanders and Warren proposals were more broad-based.) Of the 25 wealthiest people in the country, 13 of them are sitting on public stock that they paid virtually nothing for, making for more than $1 trillion in suddenly taxable assets, according to Bloomberg. People like Bezos and Musk would, in theory, face immediate tax bills of $40 to $50 billion, each.

That might create a minor headache for the Treasury Department, given that annual revenues from the billionaire tax would be dependent on the movement of the stock market, in general, and the value of mega-cap tech stocks, in particular. Such highly concentrated revenues would also be vulnerable to whatever tricks could be pulled off by individual billionaires. There would be enormous and immediate pressure on their wealth management teams to find creative workarounds. One likelihood, according to aides I surveyed, is that the ultra-wealthy would respond by shifting assets into investments that cannot be neatly assessed, in the parlance of tax nerds, on a “mark-to-market” basis, such as rare paintings and even gemstones, or even into private companies, where the valuation is a bit more subjective. One wealth manager posited that some Americans could try to move more assets overseas, or at least out of their name.

Wyden’s team seems to believe they can defeat the tax mitigation industry with legislation that would charge interest on nontraded assets, impose a capital-gains tax on gifts, and place new limits on how billionaires can use trusts, among other arcane strategies. And Wyden, to his credit, has been working on such proposals for years, deploying red teams to scout out any potential loopholes. But it is impossible to know, until an unprecedented tax goes into effect, whether the offense or defense will win. On the one side is a beleaguered I.R.S., in desperate need of a bigger enforcement budget that Washington seems unwilling to grant. On the other side is a highly-paid, highly-motivated group of success machines with their attendant family offices, bankers, and private tax specialists, many of whom would likely be hired away from the public sector to offer their expertise. Then again, the billionaire tax would affect such a small number of taxpayers that the I.R.S. may be able to train its meager resources quite narrowly. How many auditors can the tax man sic on Mark Zuckerberg?

An estate attorney I spoke with suggested that low single-digit billionaires would have some maneuvers at their disposal to bring their taxable assets below the $1 billion threshold. As for the Zuckerbergs of the world, he said, “I think they’re probably screwed.” The best tax-minimization strategy would be to pray that a billionaire tax would be struck down by the Supreme Court.

One of the great, untested challenges for the Silicon Valley set concerns their ability to liquidate equity in the companies they control. Conservatives like venture capitalist David Sacks, argue, somewhat hyperbolically, that a tax like this would spell the end of founder control, because the ultra-rich would have to sell trillions of dollars worth of shares over the next five years (the timeline for the first lump sum) to pay the levy. But the reality is that even Silicon Valley moderates worry about this too. 

To some extent, this is no different than a property tax—people who are home-rich, cash-poor have to come up with money each year to pay that, too. But what’s different, of course, is that the ultra-rich have access to a full menu of alternative tax-reduction strategies that could mitigate the need to liquidate stock—including the ability to apply deductions from other years when their wealth falls. And that’s to say nothing of loans they could take out against their shares. But yes, for cash-poor, stock-rich founders—Musk is the canonical example—this could trigger a liquidity crunch. As Sacks argues, it’s theoretically possible that billionaires who oversee companies without founder-friendly, dual-class stock structures, could lose majority control of these enterprises. (The Wyden bill tries to account for this by allowing up to $1 billion of tradeable stock in a single company to be labeled a non-tradeable asset.)

Some liberals will argue that this is the whole point—that billionaires should have to liquidate shares to prevent so much of America’s wealth concentrating in so few hands. After all, many billionaires are illiquid by choice—they have chosen to take their compensation not in income but in equity and stock grants, and almost never sell.

I’m not convinced, however, that America’s oligarchs would actually face that existential crisis. For starters, the ultra-rich have unparalleled, and seemingly unencumbered lines of credit with the country’s largest banks—they could continue to use their valuable stock as collateral and borrow against it. Clients of Morgan Stanley are taking out twice as much in these loans as they were five years ago. Larry Ellison already has a $10 billion line of credit. What’s a little more to pay a one-time tax bill, especially if you’re sitting on a company that you believe will continue to surge in value?

Second, billionaires will still retain the ability to transfer assets into charitable foundations, which wealth managers expect would become a major tax deduction strategy if Wyden’s bill became law. “If you’re Zuckerberg and have $118 billion, 99 percent of which you ultimately plan to give to charity, I think you move most of that into your foundation today rather than paying a tax of (in his case) $44 billion,” said Daniel Hemel, a tax law expert at the University of Chicago. That may be well and good for charity, unless you believe that it’s the government that should be in charge of tackling climate change, for example, not a billionaire’s family foundation. After all, that’s the whole point of this tax proposal: to raise revenue for the Treasury, not philanthropy.

But we are getting ahead of ourselves. We don’t know for sure that Kyrsten Sinema is in favor of the proposal—just that she has an open mind—and Joe Manchin today expressed discomfort with taxing unrealized gains, calling the tax plan “convoluted.” It appears that the House could present some serious pushback, too. But think of this as the first battle in a decade-long war. Hedge fund billionaire Cliff Asness made a good point the other week in a Wall Street Journal column when he wrote that many progressive tax proposals to-date have really targeted the top 1 percent, not the top 0.01 percent, which is the group actually driving inequality. That’s what makes this proposal different. 

Even the moderate Joe Biden of 2018 would appear to agree with that notion. Just after he delivered that line about not demonizing the wealthy, promising that billionaires aren’t the “bad guys,” Biden seemed to second-guess himself, warning about how America’s wealth divide strains our common identity. “This gap is yawning. It’s gaping,” he said. “And it’s having the effect of pulling us apart.”

FOUR STORIES WE'RE TALKING ABOUT