EXPLAINER: How would billionaire income tax work?

WASHINGTON (AP) — A “Billionaire Minimum Income Tax” is included in President Joe Biden’s fiscal year 2023 budget proposal — part of the administration’s effort to reduce the federal deficit over the next decade and fund new spending. The proposal “eliminates the inefficient sheltering of income for decades or generations,” the White House says.

Whether Congress will approve is a major question as the administration outlines its hope to tax the nation's highest earners.

Here's how it would work:

HOW WOULD THE TAX APPLY?

The budget proposes that households worth more than $100 million pay at least 20% in taxes on both income and “unrealized gains”— the increase in an unsold investment’s value. For many wealthy individuals, the administration says, that “true income” never gets taxed since it can be held onto for decades and sometimes generations.

Biden's proposal would allow wealthy households to spread some payments on unrealized gains over nine years, and then for five years on new income going forward. Stretching payments over multiple years is meant to smooth yearly variations in investment income, while still ensuring that the wealthiest end up paying a minimum tax rate of 20 percent. In effect, the Billionaire Minimum Income Tax payments are a prepayment of tax obligations these households will owe when they later realize their gains.

This is an extremely nuanced policy. The tax is targeting the ultra wealthy. It's taxing gains achieved from their wealth, but it's real and unrealized income rather than simply the underlying assets.

That's why David Gamage, a tax law professor at Indiana University says “it's not a wealth tax, it's an income tax reform." He says, “This is a minimum income tax that includes the true economic value” of income that can be held for a...