President Biden’s “Made in America Tax Plan,” which we’re about to see in detail, is designed to pay for his $2 trillion “infrastructure,” as very broadly defined, “plan.”
Last year, candidate Biden promised to repeal the “Trump Tax Cuts.” Biden also promised not to raise taxes on incomes of less than $400,000 per year. Those two promises conflict. Most of the so-called Trump Tax Cuts contained in the Tax Cuts and Jobs Act of 2017 benefited not only corporations, but everyone with across-the-board tax rate reductions. Congress, of course, will determine the final fate of any tax bill.
You will be told that the tax plan only taxes the wealthy. But corporations do not ultimately pay taxes — they collect them in the form of higher prices for goods and services. Taxes are a cost of doing business. Even if you take Democrats at their word, what about taxes on transfers of property and assets, like houses, family businesses, family farms, and stock, to heirs?
Meet “stepped-up basis.” Here’s how it works. Say you’re a 60-year-old almost-retiree whose 90-year-old parent just passed away. You inherit their Florida home they bought in 1980 for $100,000. It’s value is now $500,000. Hopefully, it won’t be complicated by a reverse mortgage or other debt secured by the value of that home. You sell it for $500,000. Thanks to “stepped-up basis,” you should owe no federal capital gains tax on the sale.
But what happens if you sell after congressional Democrats and President Biden successfully eliminate this so-called “loophole?” You’ll owe capital gains taxes. Why? Because you sold the property for $400,000 more than your parent paid for it 41 years ago.
What about inflation? There’s no adjustment for inflation under tax law. Assuming a capital gains tax rate of 20% (and that rate could go up), you will owe about $80,000 to Uncle Sam. For people with incomes over $1 million, Biden may raise capital-gains taxes to match the highest personal income tax rate of 39.5%, or even higher. And that’s not including state capital-gains taxes, where they exist.
There’s talk that the Biden plan may exempt the first $1 million of “unrealized” gains, but that’s a shallow threshold for many family businesses and farms. There is also talk this change may be retroactive to Jan. 1, 2021 which would be completely unfair to anyone who inherits property in the interim.
What happens if you sell after congressional Democrats and President Biden successfully eliminate this so-called “loophole?” You’ll owe capital gains taxes.
Some Democratic politicians think “stepped-up basis” is a “tax loophole” that needs to be closed. “The stepped-up basis loophole is one of the biggest tax breaks on the books, providing an unfair advantage to the wealthiest heirs every year.” said Sen. Chris Van Hollen (D-MD).
Wealthy heirs who call themselves “patriotic millionaires,” and say they are glad to pay higher taxes, are happy to be generous with your money as well. Let them pay whatever they want in taxes or at least not cash any tax refunds sent to them.
Thanks to budget and reconciliation rules in Congress, Republicans cannot stop Democrats with the Senate 60-vote supermajority threshold to stop legislative filibusters. Democrats only need a simple majority of 51 votes to pass the bill. Today’s Senate is equally divided, with Vice President Kamala Harris available to break any tie. At least Senate rules will not allow them to include eliminating the Electoral College, making the District of Columbia a state, or increasing the size of the Supreme Court. For now.
These Democrats seem to think this money isn’t yours; it’s the government’s. They clearly believe that they can spend it better than you. It doesn’t take long before that may extend into other private property, and your pensions and IRAs may be next.
Even without the details of Biden’s tax plan, the phones of financial and tax advisors are already ringing off the hook. If stepped-up basis is eliminated, expect market disruptions as Americans unload properties, stocks, farms and businesses to pay today’s “lower” tax rates before any higher tax rates or “loophole” reductions take effect.
If you’ve done the responsible thing and invested wisely, built a successful family business or a farm, and saved money to pass along to your heirs — the American Dream — you may be about to experience the pain of America electing a tax-happy president to the White House, with a compliant Senate and Congress to boot.
Kelly D. Johnston is a retired corporate executive and former Secretary of the US Senate. He blogs at kellyjohnston.substack.com