The Biden administration is proposing a new wealth tax targeting Americans with a net worth of $100 million or more. Under the proposed plan, these high-net-worth individuals would be required to pay a 25% tax on their wealth.

Yahoo Finance's Rebecca Chen breaks down the details, discussing how wealthy individuals often avoid paying higher tax rates.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

Editor's note: This article was written by Angel Smith

Video Transcript

RACHELLE AKUFFO: Well, tax the rich is the rallying cry of many in the 99% who see billionaires paying average tax rates well below what the rest of us make. Elon Musk, the richest man in the world, saw his net worth ballooned by almost $12 billion over the span of five years, starting at $8.4 billion and exploding to $20 billion by 2023. Now, while his wealth grew, his reported income was just $1.52 billion on which he paid $455 million in taxes, making his true tax rate only 3.79%

Meanwhile, the median American household paid about 15% in average taxes. Well, President Biden's solution to this-- the billionaire tax. Here's what he had to say about it at this year's State of the Union address.

JOE BIDEN: No billionaire should pay a lower federal tax rate than a teacher, a sanitation worker, or a nurse.

[APPLAUSE]

RACHELLE AKUFFO: While many have praised President Biden for his attempt at leveling the tax playing field, some experts have pointed to flaws in the proposal. Joining me now on this is our very own Rebecca Chen. So Rebecca, what do we-- what are people saying that they dislike about this tax-- this tax?

REBECCA CHEN: Yeah, so this has been a pretty popular proposal for President Biden. He has been mentioning it very consistently throughout his term. What is really-- he really is saying? Let's take a step back and talk about what he really is proposing in his proposal. He wants to put a 25% minimum tax on billionaires and really any Americans with assets over 100 million.

So let's call these the ultra-rich. And what he's really-- he really wants is to put a wealth tax on them and that has a lot of flaws in it, says a lot of the experts that we've spoken with. And the philosopher really, if you want to tax wealth, which is something that we don't do in this country right now, you really have to figure out how to do it and what happens when the valuation of that wealth drops.

For example, in your-- you mentioned that we talked about how Elon Musk, his personal wealth went ballooned to 20 billion in 2020. And let's say in the next year, his wealth or his share in Tesla sort of dropped, then does that mean we have to pay back any wealth that we tax him on? And I think that is one of the biggest question that many experts have right now regarding President Biden's proposal.

Now, there aren't that many details on what he is proposing but then we do know that this has-- wealth tax is not something new in other countries. It has been done elsewhere. But we do want to know how that will work here, especially if the president is proposing something as high as a 25%. So this is definitely one of the biggest problem that we are seeing right now.

RACHELLE AKUFFO: And is it accurate that billionaires are paying their fair share? And if not, how do we make that a reality?

REBECCA CHEN: I think the word fair is sort of relative and it depends on who you're talking to. What President Biden is saying that is unfair is that billionaires, they usually don't have a paycheck like rest of the Americans. How they make majority of their money is through the growth of their company, the growth of their stock collection, or the growth of even their wine collection.

As long as they don't sell these growth, these are called the unrealized gains that the government cannot tax. So in a way, as long as the ultra-wealthies, they keep their stocks and they keep their assets on hand without selling, it's hard to tax that. And I think what President Biden is saying that in order to be fair, we have to count that as the ultra-wealthy's income.

We do know that a lot of Americans, actually about 70% of Americans, even in swing states, they agree with an approach like this. So that is a pretty popular stance in terms of what Americans believe. So if you ask-- if you really want to ask how-- whether this is fair, and I think most people would say it is.

And in order to make this a reality, I think, it really depends on the makeup of the Congress and what the eventual details will come out to be when President has more idea of how this would work. But before that, right now, we are still seeing this as a proposal that has many holes and flaws in it that is not ready to be voted on.

RACHELLE AKUFFO: Exactly. I know people are watching that closely, especially in an election year. Appreciate you getting us up to speed, our very own Rebecca Chen.