Democrats never seem to be lacking in ideas on how to ruin the strong economy bequeathed them by former President Donald Trump.
Biden wants to raise the top capital gains tax rate — the tax on business investment mind you — from its current 15 percent or 20 percent, depending on your income level, to 39.6 percent.
As background, the basis for capital gains tax purposes is the amount invested in a property or asset originally. Under existing longstanding tax policy, the basis is stepped up at the time of death to its current market value, so only the gain going forward counts for the inheritor of the business.
For example, let’s say a business owner bought a property for $500,000 twenty years ago. It’s now worth $1 million. For capital gains tax purposes, when the owner dies, his or her business investment is valued at $1 million.
Democratic Sens. Chris Van Hollen of Maryland, Cory Booker of New Jersey, Bernie Sanders of Vermont, Sheldon Whitehouse of Rhode Island and Elizabeth Warren of Massachusetts have proposed the Sensible Taxation and Equity Promotion (STEP) Act to remove the stepped-up basis policy.
The negative economic impact of such a move would be substantial.
A new study conducted by Regional Economic Models, Inc. for the Committee to Unleash Prosperity determined that changing the stepped-up basis policy would result in job losses ranging between 500,000 to 1 million over the next 10 years.
Additionally, there would be a loss in personal income nationwide of $1 trillion, or between $8,000 and $10,000 per American household.
The study noted that the top capital gains tax would actually be 43.4 percent under Biden’s proposal due to the existing 3.8 percent net investment income tax, which helps fund Obamacare.
The analysis does not include the impact of state and local capital gain taxes.
A tax is the price of doing business. Guess what? When you raise the price, you get fewer buyers. Pretty basic stuff, but it seems to escape certain Democrats — or they just don’t care as long as greater “equity” is achieved.
“These large negative economic impacts [caused by the STEP Act] are driven by several key factors. Increased costs, especially for small and family-owned businesses and farms, increase the risk of downsizing or closure, reduce new entry into the marketplace, and raise prices for consumers,” the REMI study stated.
“Increased financing costs in particular discourage private investment, and with it, lower R&D spending and labor productivity.”
Van Hollen acknowledged the impact of removing the stepped-up basis benefit for calculating capital gains at the time of death in a May news release, when he said there would an exemption to help smaller businesses.
“To ensure this change applies only to wealthy families, and to protect small family farms and businesses, the bill would allow all individuals to exclude up to $1 million in unrealized capital gains from this tax,” the news release said.
“For example, if someone dies holding $6 million in property for which they paid $4 million, they would only pay taxes on $1 million of that $2 million gain. If someone dies holding $3 million in property for which they paid $2 million, none of that $1 million gain would be taxable.”
Well, those are nice, manageable examples, but it is not unusual for businesses to build up many millions of dollars in assets over the lifetime of an owner.
The $1 million exemption would be quickly chewed up, leaving the rest subject to a capital gains tax of 43.4 percent.
The REMI study pointed out putting such tax policies in place would be a deterrent from companies growing their businesses, for fear of being subject to the tax, which again means lost jobs and incomes.
In April, The Wall Street Journal editorial board called Biden’s overall proposed capital gains plan, “The Dumbest Tax Increase,” because it would reduce federal revenue overall due to less business activity.
“The current top rate is 23.8%, which includes a 3.8% ObamaCare surcharge. Even in the economically irrational 1970s the top capital-gains rate never broke 40%,” the board wrote.
WSJ also quoted former Democratic President John Kennedy, who said in a message to Congress, “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy.”
The focus of tax policy should not be the utopian (and futile) attempt to create a more equitable society; rather, it should be to create the opportunity for people to launch and grow businesses, and create jobs and wealth for society.
Trump understood this and the result was the lowest unemployment rate, 3.5 percent, in 50 years.
Further, African-Africans, Hispanic-Americans and Asian-Americans enjoyed the lowest unemployment rates ever recorded.
If Democratic lawmakers were smart, and I don’t think they are, they’d leave well enough alone and allow the economy to continue to rebound under the current pro-growth tax and regulatory policies implemented by Trump and the Republican Party.
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