Biden argues the time has come to curtail tax breaks for rich heirs

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Biden argues the time has come to curtail tax breaks for wealthy heirs

Sympathy for small business owners often goes hand in hand with distrust of the government and the tax that is paid for it. But polls show that while Americans celebrate wealth creation, they believe the rich don't pay enough taxes.

President Joe Biden has proposed an increase in capital gains tax on investments, combined with the removal of special tax breaks for the wealthy. When someone sells an inherited asset, it is currently “upgrading” its original value to the date of inheritance, not its original cost. The Biden Plan eliminates the top-up.

Why we wrote that

In the name of fairness, it has long been a common practice in the US to pay more taxes from the rich. President Biden and an IRS bomb leak spark a new debate on how to do it.

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

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

"People like the idea that one day all of this will be yours," said Ray Madoff, Boston College law professor who studies estate planning and tax policy. But the big tax debate is about "America's super-rich, who are now subject to minimal tax liability."

Morris Pearl is not a billionaire. But when he retired in 2014 at the age of 50 as managing director of Blackrock Inc., the world's largest asset management company, he was a wealthy man.

"I was lucky. I have enough income from my investments that I don't have to work anymore, ”he says.

In addition, under longstanding American 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 that

In the name of fairness, it has long been a common practice in the US to pay more taxes from the rich. President Biden and an IRS bomb leak spark a new debate on how to do it.

America's relatively low taxes on wealth are often justified as an incentive for job creation by capitalist investors. However, a recent tax reform proposal proposed by President Joe Biden puts an often overlooked facet of tax law in the spotlight: wealth is more easily taxed when it is inherited over a lifetime.

President Biden's proposal to tax inherited wealth more aggressively lies at the intersection of populism and practicality. Forcing the rich to pay more taxes has long been rife, including among Republicans, whose elected officials tend to push in the opposite direction. The frustration of growing wealth inequality is at the heart of politics in the United States and other rich democracies.

ProPublica reported Tuesday that the richest 25 Americans paid little or no income tax from 2014 to 2018, thanks to a tax bill that rewards capital and penalizes labor incomes, according to leaked data from the Internal Revenue Service. The exposure of the paltry tax debts of billionaires like Elon Musk and Michael Bloomberg could draw further attention to Mr Biden's reform proposals. His government said it was investigating the leakage of confidential tax documents.

But while ending tax breaks is popular for millionaires, it can be difficult to develop tax policies that achieve intended goals. It could also be politically risky for Mr Biden and the Democrats to get a backlash over higher taxes falling on small business owners.

“The challenge is to ensure that the tax ramifications for going concern and the growth of those businesses are carefully considered. That's our main concern, ”says Pete Sepp, president of the National Taxpayers Union, a financial policy lobby group.

The tax break that Mr Biden wants to remove – and lobbyists like Mr Sepp are defending – is the "step-up-in-base" rule that allows heirs to tax capital gains from the previous appreciation of assets such as real estate and. avoid stocks. If sold, the original value is promoted up to the time of inheritance. Look at Amazon founder Jeff Bezos. His heirs would value his Amazon stock at close of trading, not the value when he was building the company.

Brenda Holland, a hotel worker laid off during the pandemic last year, speaks in Tukwila, Washington on May 4, 2021, before Governor Jay Inslee signed a bill introducing a new capital gains tax on high profits for stocks, bonds and other assets some Washington state residents.

Instead, the Biden government proposes realizing and taxing inherited assets in the event of death, while raising the top rate of capital gains tax for high earners from 23.8% to 43.4%. Taken together, these changes could net worth up to $ 400 billion over 10 years. (By comparison, an increase in the top income tax bracket from 37% to 39.6%, as suggested by Mr Biden, could be worth $ 100 billion over the same period.)

The proposed change is part of a larger plan by Biden to fund its ambitious domestic spending program while delivering on its pledge not to levy taxes on middle-class households.

While the proposal shakes tax attorneys and estate planners – and stirs dust in Congress – not all rich Americans are reflexively against it.

Mr. Pearl, who lives in New York City, chairs the Patriotic Millionaires, a group of wealthy progressives who advocate higher taxes and a livable minimum wage. He supports Mr Biden's proposal to increase capital rate of return and abolish the heir top-up, despite the impact on his two adult sons who will inherit his property.

"I don't think there's a reason they shouldn't tax those profits if they inherit my stock," he says.

Why this particular loophole is in the tax code is no secret, he adds. "The rules are written for rich people, and rich people prefer not to pay taxes."

Billionaires versus family businesses

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. So 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 easily than income, such families enjoy tax breaks even before wealth is transferred between generations, says Ray Madoff, Boston College law professor who studies estate planning and tax policy.

"This is about America's super-rich, who are now subject to minimal tax liability," she says.

But enforcing capital gains in the event of death could unsettle family businesses that are confronted with a high tax burden. This includes rural business owners, whose representatives have sounded the alarm about the Biden tax plan: Last month, 13 Democratic representatives from rural districts wrote to House Speaker Nancy Pelosi to request exemptions for family businesses.

“Farms, ranches, and some family businesses need strong protection against this tax change to ensure they don't get liquidated or sold.

The White House has announced that certain family businesses could defer paying capital gains tax to avoid liquidations, provided the business remains family-owned.

Sympathy for small business owners often goes hand in hand with distrust of the government and the tax that is paid for it. This is especially strong when it comes to inheritance tax, a separate levy on a person's total wealth that Republicans referred to as a "death tax." Under President Donald Trump, the exemption has more than doubled to $ 11.7 million, which means even less to pay.

But polls show that while Americans celebrate wealth creation, they believe the rich don't pay enough taxes. Ordinary taxpayers can also become suspicious of inherited wealth. In a January Reuters / Ipsos poll that asked if "the very rich are allowed to keep their money even if it means increasing inequality," 54% disagreed.

While the fate of family businesses and factories may spark public debate, analysts point out that they represent only a fraction of the inherited wealth that would be taxed under Mr. Biden's plan.

“People like the idea that all of this will one day be yours. That is a piece. But it looks very different when someone inherits the family business or a hundred millionaire passes on his wealth, ”says Professor Madoff.

Sales issues – and fairness

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

Higher interest rates on capital gains alone would not help President Biden's agenda. In fact, the University of Pennsylvania's Penn Wharton Budget Model (PWBM) predicted that the IRS would actually generate less revenue over the next decade as investors would hold assets longer knowing they could transfer them to their descendants, without realizing these profits.

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Removing the step-up basis would reverse this trend: tax revenues would rise, not fall, as investors no longer have discretion to realize profits, said John Ricco, policy director at PWBM. How much? Wharton's model predicts $ 113 billion over 10 years, less than other estimates.

Mr Ricco says these projections are important, but so is President Biden's promise to tackle economic inequality. It is “not just about increasing income. It is just as much an attempt to shape the distribution of income as many Americans would think is more equitable. "