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Morris Pearl isn鈥檛 a billionaire. But by the time he retired in his mid-50s in 2014 as managing director of Blackrock Inc., the world鈥檚 biggest asset management firm, he was a rich man.

鈥淚鈥檝e been fortunate. I have enough income from my investments so I don鈥檛 need to work anymore,鈥� he says.

What鈥檚 more, under long-standing American tax law taxpayers聽like Mr. Pearl have聽long enjoyed聽advantages when it comes to passing wealth from one generation to the next.聽

Often, America鈥檚 relatively low taxes on wealth are justified as an incentive for job creation by capitalist investors.聽But a recent tax reform proposal by President Joe Biden is putting the spotlight on an often overlooked facet of the tax code:聽Wealth is taxed more lightly when it's inherited鈥�,鈥嬄爓hich creates聽a disincentive for the wealthy to sell assets聽and reinvest their capital during their lifetime鈥媠.鈥�

President Biden鈥檚 proposal聽to tax inherited wealth more aggressively聽sits at the intersection聽of populism and practicality. Forcing the rich to pay more in taxes has long been broadly popular, including among Republicans whose elected representatives tend to push in the opposite direction. Frustration over rising wealth inequality has taken center stage in the politics of the United States and other rich democracies.聽

ProPublica reported Tuesday that the richest 25 Americans from 2014 to 2018, thanks to a tax code that rewards capital and penalizes labor income, according to leaked Internal Revenue Service data. The revelation of the paltry tax liabilities of billionaires like Elon Musk and Michael Bloomberg could draw further attention to Mr. Biden鈥檚 reform proposals. His administration said it was investigating the leak of confidential tax records.

But while ending tax breaks for millionaires is popular, it can be tricky to craft tax policy that hits the intended targets. For Mr. Biden and Democrats, it could also be politically risky to incur a backlash over higher levels of taxation that fall on small-business owners.聽

鈥淭he challenge is to be sure that the tax consequences for continuing businesses and being able to provide for these businesses to grow [are] thought through carefully. That鈥檚 where our primary concern is,鈥� says Pete Sepp, president of the National Taxpayers Union,聽a lobbying group on fiscal policy.聽

The tax break that Mr. Biden wants to eliminate 鈥撀燼nd lobbyists like Mr. Sepp are defending 鈥撀爄s the 鈥渟tep-up in basis鈥� rule, which allows heirs to avoid taxation for capital gains on the past appreciation of assets like聽real estate and stocks. If and when they do sell, the original value is stepped up to the date of inheritance.聽Consider Amazon founder Jeff Bezos. His heirs would inherit his Amazon stock聽valued at its market close, not its value when he was building the company.

Ted S. Warren/AP

Brenda Holland, a hotel housekeeping worker who was laid off last year during the pandemic, speaks on May 4, 2021, in Tukwila, Washington, before Gov. Jay Inslee signed a bill into law that levies a new capital gains tax on high-profit stocks, bonds, and other assets for some residents of Washington state.

Instead, the Biden administration proposes to realize and tax inherited assets at death, while also raising the top rate of capital gains taxes for high earners from 23.8% to 43.4%. Taken together, these changes could potentially net as much as $400 billion over 10 years. (By comparison, raising the top bracket of income tax from 37% to 39.6%, as Mr. Biden has proposed, could be worth $100 billion over the same period.)聽

The proposed change is part of a larger Biden plan to fund his ambitious domestic spending program, while keeping his pledge not to raise taxes on middle-class households.聽

Even as the proposal rattles tax attorneys and estate planners 鈥� and kicks up dust in Congress 鈥� not all rich Americans reflexively oppose the idea.聽

Mr. Pearl, who lives in New York City, chairs the Patriotic Millionaires, a group of wealthy progressives who advocate for higher taxes and a livable minimum wage. He supports Mr. Biden鈥檚 proposal to raise capital gains rates and eliminate the step-up for heirs, despite the implications for his two adult sons who stand to inherit his fortune.聽

鈥淚 don鈥檛 think there鈥檚 any reason why if they inherit my stocks they shouldn鈥檛 pay tax on those gains,鈥� he says.聽

Why this particular loophole is in the tax code is no mystery, he adds. 鈥淭he rules were written for the convenience of rich people, and rich people prefer not paying taxes.鈥�

Billionaires versus family farms

The vast majority of Americans would be unaffected by the changes, since they inherit too little wealth to tax.聽The Biden plan includes a $1 million per-person exemption for capital gains on inherited assets; principal residences are already excluded up to $250,000 per person. So the burden would fall mostly on upper-income families who own multiple houses and stocks, bonds, and other financial assets.聽

Since capital is taxed more lightly than income, such families already enjoy tax advantages, even before wealth is transferred between generations, says Ray Madoff, a law professor at Boston College who studies estate planning and tax policy.聽

鈥淭his is about the super-wealthy of America who are subject today to minimal tax liability,鈥� she says.聽

But forcing the realization of capital gains at death could unsettle family-owned businesses that face a hefty tax bill. This includes rural business owners whose representatives have sounded the alarm over the Biden tax plan: Last month 13 Democratic representatives from rural districts to call for exemptions for family farms.聽

鈥淔arms, ranches, and some family businesses require strong protections from this tax change to ensure they are not forced to be liquidated or sold off for parts, and that need is even stronger for those farms that have been held for generations,鈥� the members wrote.聽

The White House has said certain family-owned firms could defer paying capital gains tax to avoid liquidations, provided the business remains in family hands.聽

Sympathy for small-business owners often goes hand in hand with distrust of government and the taxation that pays for it. This is especially potent when it comes to the estate tax, a separate levy on the total wealth of a person that Republicans branded a 鈥渄eath tax.鈥� Under President Donald Trump, its exemption more than doubled to $11.7 million, meaning even fewer have to pay it.聽

But polling shows that while Americans celebrate wealth creation, they believe the rich pay too little in taxes. Ordinary taxpayers may also be growing wary of inherited fortunes. In that asked if 鈥渢he very rich should be allowed to keep the money they have, even if that means increasing inequality,鈥� 54% disagreed.聽

While the fate of family farms and factories can animate public debate, analysts say they represent only a fraction of the inherited assets that would be taxed under Mr. Biden鈥檚 plan.聽

"People like the idea that someday all this will be yours. That鈥檚 one piece. But that looks very different if someone is passing on the family farm or a centibillionaire is passing on his wealth,鈥� says Professor Madoff.聽

Questions of revenue 鈥� and fairness

Still, the White House proposal to raise capital gains taxes for high earners is roundly opposed by Republicans in Congress, who say it will discourage investment and lead to lower productivity and wage growth.聽

On their own, higher rates on capital gains wouldn鈥檛 help President Biden鈥檚 agenda. Indeed, the Penn Wharton Budget Model (PWBM) at the University of Pennsylvania over the next decade because investors would hold assets longer, knowing they could transfer them to their descendants without realizing those gains.聽

Ending the step-up basis would reverse that trend: Tax receipts would go up, not down, since investors would no longer have discretion to realize gains, says John Ricco, policy director at PWBM. How much? Wharton鈥檚 model predicts $113 billion over 10 years, less than other estimates.聽

Mr. Ricco says these projections matter, but so does President Biden鈥檚 promise to tackle economic inequality. It鈥檚 鈥渘ot just about raising revenue. It鈥檚 as much an attempt to shape the distribution of income in a way that a lot of Americans would think is more equitable.鈥�