Opposition to Biden’s tax plan has nothing to do with small businesses or family farms – ITEP

Special interests lobbying against President Joe Biden’s tax agenda claim his proposed corporate tax rate hike will hurt small businesses and his proposed capital gains tax reforms will hurt family farms. Both claims are absurd attempts at powerful interests to claim that they are standing up for the little guy.

Real small businesses don’t need Trump’s tax breaks

Let’s start with Biden’s proposal to raise the corporate tax rate, which Trump tax law reduced by 14 percentage points, from 35% to 21%. Biden wants to reverse half of that reduction, bringing it to 28%, and he’s proposing to close several special breaks and loopholes that allow some businesses to avoid paying any federal income tax.

Corporate tax cuts have always been very unpopular. For 15 years, Gallup has asked the public whether companies pay too much, the right amount, or too little in taxes, and each year between 62% and 73% of respondents say companies pay too small.

Given this reality, big business isn’t trying to convince anyone that they need the tax cuts Trump has given them. Instead, their lobbyists claim that the 21% rate must be preserved to protect small businesses.

This is a convoluted argument for many reasons. Most true small businesses are not “C corporations”, the entities required to pay corporate income tax, but are incorporated as “pass-through” entities, which means their profits are taxed as the personal income of their owners and not subject to corporation tax. And anyway, small businesses get other tax breaks, like the accrual that makes their investments tax exempt under Section 179.

But even if it was believed that small C corporations did not need a rate higher than 21%, what stops Congress from passing a higher rate for large corporations? Prior to Trump tax law, corporation tax was a progressive tax, with rates below 35% on the first $ 10 million of income a corporation reported. These lower rates were rarely discussed in tax debates because they did not matter for large companies, but, in theory, they could be reinstated for companies with small profits.

But when Wall Street Journal reporter Richard Rubin recently raised the possibility with Chamber of Commerce officials, they responded that it would undermine the “simplicity” of a flat rate and hurt businesses as they grow. develop.

Compared to the bizarre, convoluted schemes companies use to avoid taxes (transfer pricing deals to funnel profits across Ireland, then Bermuda, then back to Ireland, anyone?), A graduated rate hardly constitutes a complexity.

The real debate is not about small businesses. The question is whether a company like Amazon, which has paid an effective rate of just 4.3% in the past three years, should pay higher taxes. But the Chamber of Commerce does not want to have this debate, which it would surely lose.

Family farms won’t be hurt by Biden’s proposals

Meanwhile, President Biden is also proposing to raise taxes on the income of the rich. One of his proposals would end the personal income tax exemption for capital gains on assets left to heirs. Lobbyists representing very wealthy people and powerful interests claim it will hurt family farms. This assertion is false.

When a person owns an asset that increases in value, that appreciation is income for all intents and purposes, as it increases the owner’s ability to buy something or invest in something. If you owned an asset for a year that was worth $ 1 million when you acquired it and is now worth $ 2 million, an economist would say that you received income of at least $ 1 million over the course of of the year.

But the tax code does not recognize the capital gain of an asset as income until it is realized as a profit when the asset is sold, which means that the taxpayer realizes a profit. -value. The tax code offers an even bigger break when the owner of a valued asset dies. At this stage, the unrealized capital gains are forgotten with regard to the tax code and will never be taxed.

The 25 billionaires featured in a recent expose of ProPublica have all paid very little tax on their actual income, as much of it is unrealized capital gains. Unless the law changes, this income will escape taxes entirely when they die and pass their astronomically valued assets on to their heirs.

Biden proposes to end this break by taxing certain unrealized capital gains on the death of asset holders. The proposal would apply to unrealized capital gains greater than $ 1 million, or $ 2 million in the case of a married couple. The capital gains tax on family farms and businesses would not be due as long as they remain family-owned.

Opponents of the proposal know they cannot win a debate over what the policy would do, namely prevent billionaires like Jeff Bezos and Elon Musk from avoiding taxes on the majority of their real income. So, instead, opponents claim that the proposal would hurt family farmers, who are seen as a more sympathetic group, even though the proposal would do no such thing.

For example, Senator John Boozman, the Republican head of the Senate Agriculture Committee, wrote a recent article notice published by Fox News claiming Biden’s proposal could result in tax bills for farm families that “take years to pay.”

This is not true. The treasure explanation of the President’s Income Proposal states (on page 63), “Payment of capital gains tax on certain family owned and operated businesses would not be due until the interest in the business is sold.” or that the business ceases to be family-owned and operated.

Here is what it means. Imagine your parents bought land several years ago for $ 100,000, which means their “base” on the land is $ 100,000. Today, the land is worth $ 2.2 million. If they sold it for $ 2.2 million today, the gain would equal the selling price minus the base, which would come to $ 2.1 million.

But your parents don’t sell the land, so they have a unrealized capital gain of $ 2.1 million. They die and leave the land to you. Under current law, this unrealized capital gain of $ 2.1 million will never be taxed.

Your “base” is “increased” to the value on the day you inherit it, or $ 2.2 million. You could sell the land immediately for $ 2.2 million, and since the sale price is no more than your base, you would not realize any capital gain under the current rules and you would not pay any tax on the proceeds.

What would change under the president’s proposal? If the earth is do not part of a family business such as a family farm, and then upon the death of your second parent, a fraction of the $ 2.1 million unrealized capital gain would be included as taxable income on their last tax return. Only a fraction would be included in taxable income because Biden’s proposal would exempt the first $ 2 million (in the case of a married couple). Thus, of the $ 2.1 million of unrealized capital gain, $ 100,000 would be included as taxable income on their final tax return. (The proposal would pay the tax over 15 years.)

However, if the land is part of a family business such as a family farm and you continue to operate the business or farm, you do not have to pay tax on the unrealized capital gain. The tax would not be payable until the day you (or your family members who inherit from you) decide to sell it or stop using it for business or farming.

But even in this situation, it’s hard to imagine why it would take years to pay the tax, as Boozman claims. If you decide to sell the land, you will of course receive money for the land, and only a fraction of that money will be used to pay income tax on the capital gain. The maximum rate on all types of income under Biden’s plan is 39.6%. So even in the unlikely event that the full value of the land is unrealized capital gains, the maximum tax could be 39.6% of the money you receive.

In other words, families who pass a farm (or any family business) from one generation to the next would not be affected by Biden’s proposal as long as they continue to operate it as a family business. . A family that decides to sell a farm or business for a profit will pay income taxes just as they would pay taxes on other types of income.

That’s why opposing Biden’s capital gains proposals has nothing to do with protecting family farms. Instead, opponents are trying to ensure that people like Jeff Bezos and Elon Musk never have to pay taxes on their unrealized capital gains, which make up the vast majority of their real income.

Opponents of Biden’s tax hikes can’t win an argument over the actual proposals

Opponents of Biden’s tax plan are not discussing the components of that plan or the facts behind the plan because they know they cannot win a debate on these topics.

President Biden rightly refers to the ITEP discovery that 55 profitable companies did not pay taxes last year as a reason to pass its corporate tax proposals. Opponents will never convince the public that it’s perfectly okay for businesses to avoid taxes, so they change the subject for small businesses that aren’t even affected by his plans.

The public is also outraged by the 25 billionaires who pay next to nothing out of their real income, as ProPublica found out, which would also be address by Biden’s plan. Opponents will never convince the public that these billionaires don’t need to pay taxes, so they change the subject of family farms.

Perhaps the best proof that Biden’s plan would bring worthy improvements to our tax system is that opponents really don’t have an answer.

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