Lawmakers in Congress are tightening the screws on the ultra-wealthy with new legislation that could close the biggest tax loophole used by the top 0.01%.

On Nov. 30, Senate Finance Committee Chairman and Oregon Democrat Ron Wyden unveiled the Billionaires Income Tax Act—a new piece of legislation that would require America’s wealthiest investors to pay taxes on their capital gains every year.

That would mark a huge departure from the current system, where capital gains are taxed only after assets are sold.

The law would only apply to taxpayers with more than $1 billion in assets or those who’ve earned at least $100 million in income for three consecutive years.

Wyden’s proposal also addresses the tricky area of “nontradable assets,” such as real estate and expensive art, by creating a complex formula for taxing these and other illiquid assets.

“The Billionaires Income Tax Act would, for the first time, end one of the most prominent, legal ways that billionaires avoid paying taxes known as ‘buy, borrow, die,’” Wyden said in the Committee’s official statement.

“Buy, borrow, die” describes a tax strategy ultra-wealthy investors use to legally avoid paying taxes. Basically, they use their wealth to buy assets that go up in value, borrow against the assets to fund their lavish lifestyle, and then pass on those assets to their beneficiaries once they die.

“Plain and simple, the system is rigged to benefit the ultra-rich and it’s time we level the playing field,” Democratic Senator Tammy Baldwin said of the bill.

While experts say a deeply divided Congress will likely derail this bill in the current term, many Americans agree with Baldwin about the rich not paying their fair share.

More Americans resent billionaires

Nothing highlights the major advantage that the current capital gains tax system gives to the rich better than Covid.

The combination of zero interest rates and money printing drove asset prices—stocks, real estate, and even fine art—to record highs. According to an analysis by the Institute for Policy Studies, American billionaires saw their net worth surge by at least 62% during this time.

American workers—whose primary source of income is wages rather than assets—didn't benefit from the pandemic as much.

The stimulus that propelled asset prices also set off the highest inflation in 40 years. So, while wages for American workers soared on paper, real disposable income in the U.S. has barely budged.

Not only that, the average American actually pays a 10 times higher effective tax rate than some of the country’s richest.

Using pre-pandemic figures as an example, average Americans paid an effective tax rate of 24.2% between 2014 and 2018. By comparison, billionaires Warren Buffett, Jeff Bezos, Michael Bloomberg, and Elon Musk paid between 0.1% and 3.27% of their income on taxes.

In fact, the true tax rate of the richest 25 Americans was only 3.4% over this period, according to a ProPublica analysis.

Leveling the playing field?

The Billionaires Income Tax Act isn’t the only proposed policy targeting the ultra-wealthy.

President Biden’s State of the Union address proposed various tax reforms, including the Billionaire Minimum Income Tax Act, expanding taxes on stock buybacks, removing capital gains tax breaks, and raising corporate taxes.

According to Biden’s latest budget estimate, these programs could increase federal revenue by $1.17 trillion between 2024 and 2033.

Amy Hanauer, executive director of the Institute on Taxation and Economic Policy, believes these programs could help Washington pay down its massive deficits without all the debt ceiling drama.

“If Congress chooses, it could use some of the proceeds for debt reduction. And we’d still have more resources for essentials that citizens of other nations get, like low-cost college, universal paid leave, and quality childcare,” she wrote in an op-ed.

But not everyone is convinced that billionaire tax programs can level the playing field.

NYU professor Aswath Damodaran believes billionaire taxes are “micro-targetted” and less likely to deliver their intended results.

“As a general rule, broad-based taxes—those affecting most people—are more likely to deliver predicted revenues than those that affect a narrow subset of the population,” he said.

Then there’s the potential issue of federal wealth taxes being unconstitutional—something Beverley Moran, professor emerita of law at Vanderbilt University, warned about in an op-ed.

“Wealth taxes violate Article I, Section 2, Clause 3 of the U.S. Constitution, which forbids the federal government from assessing “direct taxes” that aren’t apportioned equally among the states,” she wrote.