July 16, 2021
Director of Federal Tax Policy
July 16, 2021
Special interests lobbying against President Joe Biden’s tax agenda claim that his proposed corporate income tax rate hike will harm small businesses and that his proposed capital gains tax reforms will hurt family farms. Both claims are absurd attempts by powerful interests to pretend they are defending the little guy.
Truly Small Businesses Do Not Need Trump’s Corporate Tax Breaks
Let’s start with Biden’s proposal to raise the corporate tax rate, which the Trump tax law cut by 14 percentage points, from 35 percent to 21 percent. Biden wants to reverse half of that cut, bringing it to 28 percent, and he proposes to shut down several special breaks and loopholes that allow some corporations to avoid paying any federal income tax.
Corporate tax cuts have always been wildly unpopular. For 15 years Gallup has asked the public if corporations pay too much, the right amount, or too little in taxes, and each year somewhere from 62 percent to 73 percent of respondents say corporations pay too little.
Given this reality, large corporations do not try to convince anyone that they need the tax cuts that Trump gave them. Instead, their lobbyists claim that the 21 percent rate must be preserved to protect small businesses.
This is a convoluted argument for many reasons. Most truly small businesses are not “C corporations,” the entities required to pay the corporate income tax, but are set up as “pass-through” entities, which means their profits are taxed as the personal income of their owners and not subject to the corporate income tax. And anyway, small businesses have other tax breaks, such as the expensing that makes their investments tax-free under section 179.
But even if one did believe that small C corporations need a rate no higher than 21 percent, what stops Congress from enacting a higher rate on larger corporations? Before the Trump tax law, the corporate income tax was a graduated tax, with rates lower than 35 percent on the first $10 million of income reported by a corporation. These lower rates were seldom discussed in tax debates because they did not matter for large corporations, but, in theory, they could be revived for corporations with small profits.
But when Wall Street Journal reporter Richard Rubin brought up this possibility recently with officials from the Chamber of Commerce, they replied that this would detract from the “simplicity” of a flat rate and would harm companies as they grow.
Business groups arguing against corporate tax rate hike because of effect on small C corps (which exist for a few reasons and would pay more in Biden plan).
I asked on US Chamber call if they would back graduated rates.
Answer: No. (Simplicity, effects as companies grow, etc.)
— Richard Rubin (@RichardRubinDC) July 13, 2021
Compared to the bizarre and convoluted schemes corporations use to avoid taxes (transfer pricing agreements to route profits through Ireland, then Bermuda, then back to Ireland, anyone?) a graduated rate hardly constitutes complexity.
The real debate is not about small businesses. It’s about whether a corporation like Amazon, which paid an effective rate of just 4.3 percent over the past three years, should pay higher taxes. But the Chamber of Commerce does not want to have that debate, which they would surely lose.
Family Farms Will Not Be Hurt by Biden’s Proposals
Meanwhile, President Biden also proposes to raise personal income taxes on the rich. One of his proposals would end the existing personal income tax break for capital gains on assets left to heirs. Lobbyists representing some very wealthy people and powerful interests claim that this will harm family farms. This claim is false.
When a person owns an asset that increases in value, that appreciation is income for all practical purposes because it increases the ability of the owner to buy something or invest in something. If you have owned an asset for a year that was worth $1 million when you acquired it and is worth $2 million today, an economist would say you have received income of at least $1 million over the year.
But the tax code does not recognize asset appreciation as income until it is realized as a profit when the asset is sold, meaning the taxpayer realizes a capital gain. The tax code provides an even bigger break when the owner of an appreciated asset dies. At that point, unrealized capital gains are forgotten as far as the tax code is concerned and will never be taxed.
The 25 billionaires featured in a recent expose by ProPublica all paid very little taxes on their true income because so much of it is unrealized capital gains. Unless the law changes, that income will escape taxes entirely when they die and pass on their astronomically appreciated assets to heirs.
Biden proposes to end this break by taxing some unrealized capital gains when asset owners die. The proposal would apply to unrealized capital gains in excess of $1 million, or $2 million in the case of a married couple. The tax on capital gains on family farms and businesses would not be due so long as they remain family-owned and family-operated.
Opponents of the proposal know that they cannot win a debate about what the policy would do—which is to stop 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, which are seen as a more sympathetic group, even though the proposal would do no such thing.
For example, Sen. John Boozman, the ranking Republican on the Senate Agriculture Committee, wrote a recent opinion published by Fox News claiming that Biden’s proposal could result in tax bills for farming families that “take years to pay off.”
This is not true. The Treasury’s explanation of the President’s revenue proposals states (on page 63), “Payment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.”
Here is what this means. Imagine your parents bought some land several years ago for $100,000, which means their “basis” in the land is $100,000. Today the land is worth $2.2 million. If they sold it for $2.2 million today, the capital gain would equal the sale price minus the basis, which would come to $2.1 million.
But your parents do not sell the land, so they have an unrealized capital gain of $2.1 million. They die and leave you the land. Under current law, that unrealized capital gain of $2.1 million will never be taxed.
Your “basis” is “stepped up” to the value on the day you inherit it, which is $2.2 million. You could sell the land immediately for $2.2 million, and because the sale price is no higher than your basis, you would not realize any capital gain at all under the current rules and you would pay no taxes on the proceeds.
What would change under the president’s proposal? If the land is not part of a family business such as a family farm, then upon your second parent’s death, a fraction of the $2.1 million in unrealized capital gain would be included as taxable income on their final tax return. Only a fraction would be included as taxable income because Biden’s proposal would exempt the first $2 million (in the case of a married couple). So, of the $2.1 million in unrealized capital gain, $100,000 of that would be included as taxable income on their final income tax return. (The proposal would allow the tax to be paid 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 due until the day you (or family members who inherit the land from you) decide to sell it or stop using it for the business or for farming.
But even in that situation, it is difficult to imagine why it would take years to pay the tax, as Boozman claims. If you decide to sell the land, of course you would receive cash for the land, and only a fraction of that cash would go toward paying the income tax on the capital gain. The top rate on all types of income under Biden’s plan is 39.6 percent. So, even in the unlikely event that the entire value of the land is unrealized capital gains, the most the tax could be is 39.6 percent of the cash you receive.
In other words, families that pass a farm (or any family business) from one generation to the next would not be affected by Biden’s proposal so long as they continue to operate it as a family enterprise. A family that decides to sell a farm or business for a profit will pay income taxes on the profit as they would pay income taxes on other types of income.
This is why the opposition to Biden’s capital gains proposals has nothing to do with protecting family farms. Instead, opponents are attempting to ensure that people like Jeff Bezos and Elon Musk never have to pay taxes on their unrealized capital gains, which is the vast majority of their true income.
Opponents of Biden’s Tax Increases Cannot Win an Argument About the Actual Proposals
Opponents of Biden’s tax plan do not discuss the components of that plan or the facts motivating the plan because they know they cannot win a debate on those topics.
President Biden rightly refers to ITEP’s finding that 55 profitable corporations did not pay taxes last year as a reason to enact his corporate tax proposals. Opponents will never convince the public that it is perfectly fine for corporations to avoid taxes, so they change the subject to small businesses that are not even affected by his plans.
The public is equally outraged by the 25 billionaires paying practically nothing on their true income as ProPublica discovered, which also would be addressed by Biden’s plan. Opponents will never convince the public that those billionaires do not need to pay taxes, so they change the subject to family farms.
Perhaps the best evidence that Biden’s plan would make worthy improvements to our tax system is that opponents have no real response to it.
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