Sympathy for small business owners often goes hand in hand with distrust of the government and the taxation that pays for it. But polls show that while Americans celebrate wealth creation, they think the rich pay too little tax.

President Joe Biden has proposed an increase in the capital gains tax on investments, coupled with the removal of special inheritance tax relief for the rich. Currently, when a person sells an inherited good, the original value is “increased” up to the date of inheritance, not its original cost. The Biden plan eliminates the step forward.

Why we wrote this

Asking the rich to pay more taxes has long been widely popular in the United States in the name of fairness. President Biden and an explosive IRS leak are fueling a new debate on how to do it.

ProPublica reported Tuesday that the 25 richest Americans paid little or no income tax from 2014 to 2018, thanks to a tax code that rewards capital income, according to leaked IRS data.

The vast majority of Americans would not be affected by the changes proposed by Mr. Biden, because they inherit too little wealth to be taxed.

“People love the idea that one day it will all be yours,” says Ray Madoff, a professor of law at Boston College who studies estate planning and tax policy. But the great tax debate “relates to the super-rich in America who are now subject to minimal tax obligations.”

Morris Pearl is not a billionaire. But by the time he retired in his mid-fifties in 2014 as Managing Director of Blackrock Inc., the world’s largest asset management firm, he was a rich man.

” I was lucky. I have enough income from my investments so that I no longer need to work, ”he says.

Additionally, under long-standing US tax law, taxpayers like Mr. Pearl have long enjoyed advantages when it comes to passing wealth from one generation to the next.

Why we wrote this

Asking the rich to pay more taxes has long been widely popular in the United States in the name of fairness. President Biden and an explosive IRS leak are fueling a new debate on how to do it.

Often, relatively low US taxes on wealth are justified as an incentive for job creation by capitalist investors. But a recent tax reform proposal from President Joe Biden highlights an often overlooked facet of the tax code: Wealth is taxed more lightly when it is inherited, discouraging the wealthy from selling assets and reinvesting their capital for their life.

President Biden’s proposal to tax inherited wealth more aggressively sits at the intersection of populism and practicality. Forcing the rich to pay more taxes has long been widely popular, including among Republicans whose elected officials tend to push in the opposite direction. Frustration with growing wealth inequality has taken center stage in politics in the United States and other wealthy democracies.

ProPublica reported on Tuesday that the 25 richest Americans paid little or no income tax from 2014 to 2018, thanks to a tax code that rewards capital and penalizes labor income, according to leaked data from the Internal Revenue Service. The revelation of the paltry tax debts of billionaires like Elon Musk and Michael Bloomberg could draw more attention to Mr. Biden’s reform proposals. His administration said it was investigating the leak of confidential tax records.

But while the end of tax breaks for millionaires is popular, it can be difficult to craft a tax policy that hits the intended targets. For Mr. Biden and the Democrats, it could also be politically risky to suffer a backlash in the face of higher levels of taxation falling on small business owners.

“The challenge is to ensure that the tax consequences for the companies being sued and to be able to allow these companies to develop [are] well thought out. That’s where our main concern is, ”says Pete Sepp, president of the National Taxpayers Union, a tax policy lobby group.

The tax break that Mr Biden wants to eliminate – and which lobbyists like Mr Sepp defend – is the “basic adjustment” rule, which allows heirs to avoid the taxation of capital gains on past appreciation of assets like real estate and stocks. If and when they sell, the original value is increased until the date of inheritance. Consider Amazon founder Jeff Bezos. His heirs would inherit his Amazon stock valued at market close, not its value when the business was created.

Brenda Holland, a hotel maid who was laid off last year during the pandemic, speaks on May 4, 2021 in Tukwila, Wash., Before Gov. Jay Inslee enacts a bill that levies a new High income capital gains tax on stocks, bonds and other assets for certain residents of Washington State.

Instead, the Biden administration is proposing to realize and tax inherited assets on death, while increasing the maximum capital gains tax rate for high earners from 23.8% to 43.4%. Together, these changes could bring in up to $ 400 billion over 10 years. (By comparison, raising the top income tax bracket from 37% to 39.6%, as proposed by Mr. Biden, could be worth $ 100 billion over the same period.)

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

Even though the proposal shakes up tax attorneys and estate planners – and throws dust in Congress – not all wealthy Americans reflexively oppose the idea.

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

“I don’t think there is a reason why if they inherit my shares they shouldn’t pay tax on those earnings,” he says.

Why this particular loophole is in the tax code is no mystery, he adds. “The rules were written for the convenience of the rich, and the rich prefer not to pay taxes.”

Billionaires vs. family farms

The vast majority of Americans would not be affected by the changes because they inherit too little wealth to be taxed. The Biden plan includes a $ 1 million per person exemption for capital gains on inherited assets; primary residences are already excluded up to $ 250,000 per person. Thus, the burden would primarily fall on high-income families who own multiple homes and stocks, bonds and other financial assets.

Because capital is taxed more lightly than income, these families already enjoy tax benefits, even before the wealth is transferred between generations, says Ray Madoff, a professor of law at Boston College who studies estate planning and tax policy.

“These are America’s super-rich who are now subject to minimal tax liability,” she said.

But forcing the realization of capital gains on death could destabilize family businesses facing a heavy tax bill. This includes rural business owners whose representatives sounded the alarm bells about the Biden tax plan: Last month, 13 Democratic representatives from rural districts written to Speaker of the House Nancy Pelosi claim exemptions for family farms.

“Farms, ranches and some family businesses need strong protections against this tax change to ensure they don’t have to be liquidated or sold for parts, and this need is even greater for them. farms owned for generations, ”the members wrote.

The White House said some family businesses could defer payment of capital gains tax to avoid liquidation, provided the business remains in family hands.

Sympathy for small business owners often goes hand in hand with distrust of the government and the taxation that pays for it. This is particularly effective with respect to the inheritance tax, a separate levy on a person’s total wealth that Republicans have referred to as a “death tax.” Under President Donald Trump, its exemption more than doubled to $ 11.7 million, meaning even fewer people have to pay it.

But polls show that while Americans celebrate wealth creation, they think the rich pay too little tax. Ordinary taxpayers may also be increasingly wary of inherited fortunes. In a January poll by Reuters / Ipsos who asked if “the very rich should be allowed to keep the money they have, even if it means increased inequality”, 54% disagreed.

While the plight of family farms and factories may spark public debate, analysts say they represent only a fraction of the legacy assets that would be taxed under Mr Biden’s plan.

“People like the idea that one day it will all be yours. It’s one coin. But it looks a lot different if someone passes on the family farm or a billionaire passes on their wealth,” Prof Madoff says. .

Income issues – and equity

Still, the White House’s proposal to increase capital gains taxes for top earners is strongly opposed by Republicans in Congress, who say it will discourage investment and lead to lower productivity and growth in businesses. wages.

On their own, higher rates on capital gains would not help President Biden’s agenda. Indeed, the Penn Wharton Budget Model (PWBM) of the University of Pennsylvania predicted that the IRS would actually collect less revenue over the next decade, as investors would hold onto their assets longer, knowing that they could pass them on to their descendants without realizing those gains.

Ending the base increase would reverse this trend: tax revenues would increase, not decrease, since investors would no longer have the discretion to make gains, says John Ricco, policy director at PWBM. How? Wharton’s model predicts $ 113 billion over 10 years, less than other estimates.

Ricco says those projections are important, as is President Biden’s pledge to tackle economic inequality. It’s “not just about increasing income. It’s just as much an attempt to shape the distribution of income in a way that many Americans would think is more equitable. “



Source link