Biden is set to propose higher taxes for the rich. Here's how they work

WASHINGTON -- President Joe Biden on Tuesday is expected to tout the nation's economic health in his State of the Union Address, just days after a blockbuster jobs report showed a strong labor market has coincided with a monthslong easing of inflation.

Looking ahead, however, Biden is expected to propose solutions for what he considers an ongoing economic ill: income and wealth inequality.

WATCH LIVE: President Biden delivers State of the Union address

The wealth of the top 1% increased by $6.5 trillion in 2021, according to a study the Federal Reserve released last year. That wealthiest sliver of Americans controls 32% of the country's wealth, the study found.

The Biden administration's agenda, set to be announced Tuesday night, includes two policy proposals: a new tax on billionaires and the sharp increase of a current tax on corporate stock buybacks.

"The idea is to have a commitment to reducing inequality," Reuven Avi-Yonah, a law professor at the University of Michigan who focuses on corporate taxes, told ABC News. "There's no indication that the increase in inequality is stopping anytime soon and something should be done about it, so the Democrats say."

Here's what to know about Biden's anticipated tax proposals for wealthy individuals and corporations:

Billionaire's tax

A key part of Biden's new economic policy agenda is a billionaire's tax, which would set a minimum tax for the wealthiest Americans, the White House said.

The Biden administration has offered scant details about the proposal, but it appears to closely resemble a policy that Biden put forward last March. At that time, he called for a tax rate of at least 20% on Americans who bring in at least $100 million per year.

The tax rate would apply both to income and unrealized gains, a measure of the value a person's unsold investments have accumulated.

"President Biden is a capitalist and believes that anyone should be able to become a millionaire or a billionaire," the White House said in a statement Tuesday. "He also believes that it is wrong for America to have a tax code that results in America's wealthiest households paying a lower tax rate than working families."

Between 2018 and 2020, the nation's wealthiest 400 families paid an average tax rate of 8%, the White House's Council of Economic Advisers found.

The wealthiest 25 people saw their worth increase a combined $401 billion between 2014 and 2018, but they paid an average federal income tax of 3.4% on that wealth, ProPublica found last year. By contrast, the median American making $70,000 a year pays an average federal income tax of 14%, the outlet said.

The proposal likely will face staunch Republican opposition, giving it a low probability of becoming law, since Republicans control the House of Representatives, Avi-Yonah of the University of Michigan said.

In response to previous efforts to tax wealthy Americans, Republicans have said the measures disincentivized business investment and wealth creation, hindering economic growth.

"The truth is it will not pass now with Republicans in control of the House," Avi-Yonah said. "So it's rhetoric."

Increase to the tax on stock buybacks

In addition to the billionaire's tax, the Biden administration is expected to propose a sharp increase of a current tax on corporate stock buybacks.

Companies opt to purchase shares of their own stock as a means of returning money to shareholders, since the move typically raises the price of shares.

The Biden administration takes issue with the practice because it provides money for shareholders while evading the taxes on income imposed when a company disperses money to shareholders through dividends, according to the White House. Instead, stock buybacks return money to investors as capital gains, which are taxed at a lower rate.

"Stock buybacks enable corporations to funnel tax-advantaged payouts to wealthy and foreign investors," the White House said Tuesday.

The Inflation Reduction Act, signed into law by Biden in August 2022, imposed a 1% tax on stock buybacks. If a company purchases $100 million worth of shares, for instance, it must pay $1 million in tax.

In his State of the Union Address, Biden is expected to propose quadrupling that tax to 4%, the White House said.

As with the billionaire tax, the levy on stock buybacks is expected to face strong Republican opposition and long odds to become law.

Jesse Fried, a professor at Harvard Law School focused on corporate governance, said he opposes a tax on stock buybacks because the measures force companies to either hold onto excess capital or invest it in wasteful initiatives.

Instead, stock buybacks allow companies to return money to shareholders, who can then invest or spend the money, spurring economic activity, he said.

"You're just going to have more cash bottled up in companies," he said.

Avi-Yonah, meanwhile, said proponents of a higher tax on stock buybacks argue that the measure could pressure companies to invest money in initiatives with greater social benefit.

Supporters of the policy say companies "should be using money for other things like hiring people," Avi-Yonah said. "Stock buybacks are regressive and benefit the rich at the expense of everyone else."