A Somewhat Likely Negative Scenario in the Billionaire Tax Proposal


The new billionaire tax proposal would levy a 20% minimum tax on households worth $100MM or more, and it would tax unrealized gains. There's a scenario that is far more common than the Musk or Bezos scenario, and it has bad implications for people who aren't really that rich. It could possibly even wipe them out.

Let's say you are a business owner, and your business is quickly growing. It's privately held, and you get to the point where you are netting $5-6 million per year. In some industries, business valuation multipliers are high enough that this would value your business at $100MM, thus qualifying you for the “billionaire tax” since you own the whole pie.

Your unrealized gain is $100MM, thus you should theoretically owe $20MM in taxes. But, to date, you haven't even made $20MM over the entire life of the business (assuming it is quickly-growing)! Or, you might have made $20MM, but you almost certainly don't have $20MM. To make matters worse, your business is privately held, so it isn't particularly easy to just go sell $20MM worth of shares on the open market, and doing so would mean you now have a partner in your business, which you might not want.

A lot of discussion on this proposal has centered around the Bezos and Musk crowd, but there are a significant number of entrepreneurs who own $100MM (on paper) businesses, especially in today's world of high multipliers. Some of these people have never had $20MM in cash in their lives, and their businesses are small enough that the $100MM valuation isn't particularly stable. Saying they owe $20MM in taxes is crazy, and it has the potential to wipe them out. There is a reason we don't tax unrealized gains.


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