Senate Democrats on Wednesday unveiled a new billionaires tax proposal, an entirely new entry in the tax code, designed to help pay for Joe Biden’s sweeping domestic policy package and edge his party closer to an overall agreement on a shrunken version of the administration’s $3.5tn flagship legislation.

The proposed tax would affect those with more than $1bn in assets or incomes of more than $100m a year, and it could begin to shore up the ambitious social services and climate plan Biden is racing to finish before departing this week for the global climate summit, Cop26, in Scotland.

Democrats behind the proposal say that about 700 of America’s super-rich taxpayers would be affected by the new tax proposal.

The wealthiest people in the US include household names such as Tesla’s Elon Musk, the world’s richest person, who is worth almost a quarter of a trillion dollars. Also included are Jeff Bezos, Microsoft’s Bill Gates, Facebook’s Mark Zuckerberg, Larry Page and Sergey Brin of Google, investor Warren Buffett, the Walton family members behind Walmart, and the industrialist and libertarian activist Charles Koch.

Reports show that the wealthiest Americans became even richer during the pandemic, with the 400 richest seeing a 40% rise in their wealth as the pandemic shuttered large parts of the US economy.

“The Billionaires Income Tax would ensure billionaires pay tax every year, just like working Americans,” said the Democratic senator Ron Wyden of Oregon, the chairman of the Senate finance committee who authored the new billionaire tax proposal. “No working person in America thinks it’s right that they pay their taxes and billionaires don’t.”

However, the proposal drew doubts and criticisms from Republicans and some Democrats, including Joe Manchin, a centrist who has been central to efforts to slim down the reconciliation bill.

Speaking to reporters on Capitol Hill, the West Virginia senator said wealthy Americans should pay a “patriotic tax” of 15% to ensure that all citizens are giving something back to their country.

But when it comes to the billionaire tax, Manchin said: “I don’t like it. I don’t like the connotation that we’re targeting different people.”

Wyden’s House of Representatives counterpart, Ways and Means Committee Chairman Richard Neal, said the billionaire tax “will be very difficult because of its complexity.”

Later, the White House press secretary, Jen Psaki, was asked whether the administration was confident that Democrats’ plan would withstand legal scrutiny.

“We’re not going to support anything we don’t think is legal,” she said. “But I will tell you the president supports the billionaire tax. He looks forward to working with Congress and Chairman Wyden to make sure the highest-income Americans pay their fair share.”

At the heart of the proposal is a change in what the federal government considers income for the wealthiest individuals. Rather than just basing tax on the paycheck a billionaire receives from a company, the tax would target the unrealized gains of billionaires, which includes the billions of dollars of shares they hold in their companies.

Amazon’s Jeff Bezos, for example, makes a salary of about $80,000 a year, though his Amazon stock holdings increase in value over $10bn a year.

“If Mr Bezos does not sell any of his Amazon shares in a given year, the income tax ignores the $10bn gain, and effectively he is taxed like a middle-class person making $80,000 a year,” wrote Chuck Marr, director of federal tax policy at the Center for Budget and Policy Priorities thinktank, in a Twitter thread explaining the Democrats’ proposal.

This happens, Marr said, because the federal government does not treat gains made on stocks as income until the stock is sold. What billionaires do to get money is take out huge personal loans, using their shares as collateral. ProPublica revealed that Tesla’s Elon Musk pledged 92m shares of Tesla stock, currently worth over $1,000 a share, as collateral for personal loans.

“Why do wealthy people take out these loans? A big reason is to avoid paying taxes they would have to pay if they sold some of their assets,” Marr wrote. “With this proposal, policymakers, in effect, are acknowledging that this is a glaring loophole in the income tax that needs to be closed.”

Musk took a dig at the plan on Twitter, responding to a user who expressed concern that the proposal, if passed, would open the door to future tax hikes that would cover a wider range of middle-class Americans with investments.

“Exactly. Eventually, they run out of other people’s money and then they come for you,” tweeted Musk, who could owe as much as $50bn in taxes under the proposal.

Coupled with a new 15% corporate minimum tax, the proposal would provide alternative revenue sources that Biden needs to win over one key Democrat, Senator Kyrsten Sinema of Arizona, who had rejected the party’s earlier idea of reversing the Trump-era tax breaks on corporations and the wealthy to raise revenue.

Biden met late on Tuesday evening with Sinema and Manchin at the White House.

With the US Senate split 50-50 between Republicans and Democrats, Biden needs every Democratic senator on board to pass the budget bill with the allowable simple majority, using the so-called reconciliation process – with Vice-President Kamala Harris the casting vote in the traditional role of president of the Senate.

“No senator wants to stand up and say, ‘Gee, I think it’s just fine for billionaires to pay little or no taxes for years on end’,” said Wyden.

Biden and his party are homing in on at least $1.75tn in healthcare, childcare and climate change programs, scaling back what had been outlined as a $3.5tn plan, as they try to wrap up negotiations.

Taken together, the new tax on billionaires and the 15% corporate minimum tax are designed to fulfill Biden’s promise that no new taxes hit those earning less than $400,000 a year, or $450,000 for couples. Biden insists all the new spending will be fully paid for and not added to the national debt.