Just Taxes Blog by ITEP

The Campaign by Democratic Former Officials to Stop Taxes on the Wealthy

October 6, 2023

One of the most attention-grabbing anti-tax campaigns at work today is called SAFE, which stands for Saving America’s Family Enterprises. But it might as well mean Saving Aristocrats From Everything given the outfit’s knack for opposing any national proposal to limit special tax advantages that only the wealthy enjoy.

The basic approach of SAFE is to have Democrats who are former elected lawmakers or administration officials convince the public, media, Congress, and even the judiciary that any effort to end special tax breaks for the wealthy will actually harm the non-wealthy.

Using this tactic, SAFE sabotaged the most potentially transformative tax reform that President Biden proposed as part of his economic agenda. The group is now trying to sway the Supreme Court to put unprecedented limits on Congress’s power to raise taxes.

Heidi Heitkamp’s Transformation

SAFE was launched in 2021 by Heidi Heitkamp, the former Democratic Senator from North Dakota, to oppose President Biden’s proposal to end the tax break for capital gains on assets that wealthy people pass onto heirs, sometimes called the “stepped-up basis” rule.

The irony was that just 5 months before she began speaking out publicly against Biden’s proposal to limit this tax break, she had expressed the exact opposite view on television, calling the stepped-up basis rule “one of the biggest scams in the history of forever.”

After several media outlets reported on Heitkamp’s sudden about-face, she has not spoken much publicly on the issue, and it is unclear how much she is still involved in SAFE.

But her brief public campaign had its intended effect. The proposal was left out of the Build Back Better Act, the bill that evolved into the Inflation Reduction Act that was eventually enacted. Heitkamp did publicly support the Inflation Reduction Act in the end, when it was clear that she had saved this special break for the wealthy from the chopping block.

What Are Unrealized Capital Gains and Why Does SAFE Care About Them?

This outcome was a shame because the President’s proposal would have eliminated a very important source of unfairness in our tax code, which allows “unrealized” capital gains, a type of income that flows far more to the wealthy than anyone else, to escape the kind of taxation that applies to earnings and other income that is more common for middle-income households. Until this changes, our tax code can never be truly fair.

A capital gain is the increase in the value of an asset. A “realized” capital gain is generally the profit from selling an asset. For example, if you bought an asset for $5 million last year and this year it is worth $8 million, you have a $3 million capital gain. Under our current rules, the $3 million capital gain will be “realized” and counted as income for tax purposes only if you sell the asset. Your “basis” is the $5 million you paid for the asset. You sell it, receive $8 million for it, and subtract your basis from that $8 million to calculate your capital gain of $3 million.

Let’s say you do not sell the asset this year. In this case, you still have a capital gain of $3 million, but the capital gain is “unrealized.” The tax code does not count capital gains as income until you sell and “realize” the gain. But this unrealized gain truly is income in the sense that it ultimately expands your ability to spend by $3 million, just as if you earned $3 million doing a job.

Let’s say you never sell the asset and you pass it on to your heirs. In this case, our current tax laws provide the biggest break of all by exempting these unrealized capital gains forever.  The mechanism accomplishing this is the “stepped-up basis” rule. If the asset was worth $5 million when you purchased it and it is worth $8 million when you die, the basis for your heirs who receive it is “stepped up” to $8 million, meaning they can sell it for $8 million and report no capital gains income from the transaction.

Biden proposed to mostly end this tax loophole for the wealthy by including unrealized capital gains in taxable income when the owner of an asset dies and passes it onto their heirs. Under Biden’s plan, the first $1 million of unrealized capital gains would remain exempt (or $2 million for assets passed on by a married couple). His most recent version of this proposal would set these thresholds at $10 million for singles and $20 million for married couples.

SAFE and other opponents of the proposal often disingenuously attack it as a threat to family farms. But the most recent version of the proposal, included in the President’s annual budget plan, explains once again, (starting on page 30) that if someone inherits a farm or other family business and continues to operate it, they will not pay the tax. On top of that, if they do sell, they get 15 years to pay the tax under Biden’s proposal.

The real target of Biden’s proposal is people like Elon Musk, whose net worth increased by $14 billion over five years, almost entirely in the form of unrealized capital gains that have not been taxed. If Musk simply holds onto his assets until he dies and passes them to his heirs, his billions of unrealized gains escape the income tax forever, thanks to the stepped-up basis rule. Billionaires like Musk often arrange for most of their income to take the form of unrealized gains to exploit this special break. This is what SAFE is defending.

SAFE Relaunches to Oppose President Biden’s Next Proposal for Unrealized Capital Gains

President Biden has not stopped including the proposal in his annual budget plans. But after the debate over his economic package, he began to also include a new proposal that would tax some unrealized gains of the extraordinarily wealthy during their lifetimes. In early 2023, SAFE was relaunched to oppose this new proposal from the President, which he calls the Billionaires’ Minimum Income Tax.

The proposal would not apply to anyone whose net worth was less than $100 million and would not apply fully to anyone with a net worth of less than $200 million. While the details are a little complicated, the President’s proposal would not entirely eliminate this tax advantage even for the wealthiest individuals because it is designed as a minimum income tax, a backstop for our current tax rules to ensure that they pay at least 25 percent of their true income (including unrealized gains) in income taxes.

The spokesperson chosen to lead SAFE’s campaign against this proposal was John Breaux, the former Democratic Senator from Louisiana. Famous in the Senate for saying his vote could not be bought “but it can be rented,” he was thanked by name by President George W. Bush for helping to pass his tax cuts.

But now Breaux had something even bigger in store for SAFE. He would be part of a plot to convince the largely Trump-appointed conservative majority on the Supreme Court to issue a radical ruling to limit Congress’s taxing authority for generations to come. And to do this he needed the help of yet another Democratic luminary.

SAFE Finds a Way Around Congress: The Supreme Court

The first thing that Neal Katyal, former acting Solicitor General under President Obama, did when he returned from Burning Man this year seemed to indicate that he had experienced a break with reality. Or perhaps he had simply spent too much time with the anti-tax crusader Grover Norquist, who also attended Burning Man this year.

The amicus brief Katyal filed with the Supreme Court shortly after his trip argued that the U.S. Constitution bars Congress from ever effectively taxing all the income received by the wealthy, despite the 16th Amendment stating that the “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived” without the convoluted and unworkable restrictions on this power that had been imposed by a previous decision.

Katyal filed his amicus brief on behalf of SAFE and John Breaux in favor of the plaintiffs, a couple named Charles and Kathleen Moore. The Moores are suing the federal government on the grounds that the one-time tax on offshore profits enacted as part of the 2017 Trump tax law is unconstitutional. Their argument has two main parts. First, they claim this provision of the 2017 law is a tax on unrealized gains. Second, they claim the 16th Amendment paves the way for Congress to enact taxes on income only if the income is “realized.”

Both claims are absurd. And, astonishingly, they are being used to attack one of the few revenue-raising provisions in the 2017 law, which was supposed to somewhat control the cost of the corporate tax cuts in that legislation. In other words, the Moores and their allies demand that the Supreme Court make Trump’s corporate tax cuts even more generous.

The Moores themselves owe about $15,000 under the tax in question resulting from their stake in an Indian corporation, and their real interest in the case is clearly related to a larger ideological cause. The real goal of the Moores and the many well-funded right-wing organizations like SAFE who support them is to persuade the Court to concoct new legal principles that would characterize Biden’s tax proposals for billionaires as unconstitutional.

Whether or not the income of a foreign corporation owned by Americans like the Moores is “realized” is a question of semantics that was never seen as relevant by lawmakers – including the Republican lawmakers who drafted the part of the Trump tax law challenged in this case. Other federal provisions require that Americans who own a foreign corporation (either as sole owner or as a shareholder) must pay taxes on the profits in certain situations, even if those profits remain offshore. Without such rules, the opportunities for wealthy people to avoid taxes by shifting their income into offshore shell companies could be limitless.

After Katyal asserts that the income in question is unrealized, he then cites the one post-16th Amendment case in which the Court sided with a taxpayer against the government using reasoning that suggests income must be realized to fall within the definition used by the 16th Amendment. This 1920 case, Eisner v. Macomber, immediately caused great consternation among legal scholars and members of Congress.

His brief cannot avoid mentioning several later decisions that seem to point in the opposite direction, cases where taxpayers tried to use this very reasoning against the government but lost. Several of the decisions even called realization an “administrative convenience” rather than a constitutional requirement. Unbiased justices would recognize that this precedent is fatal to SAFE’s position, but Katyal seems optimistic that the justices will share SAFE’s biases.

The rest of Katyal’s brief speculates about future developments that are not actually before the Court. Katyal argues that the justices should declare that “income” under the 16th Amendment means “realized income” to block the President’s proposals to tax unrealized gains of the wealthy. But these proposals have not advanced in Congress, have not been enacted, and are not the issue in this case.

Katyal then travels further into fantasy, writing, “Although these proposals initially take aim at economic elites, history teaches that a tax on the unrealized gains of middle-class Americans is not far behind.” SAFE uses this kind of language often because their opposition to legislation that ends tax advantages for millionaires and billionaires is so deeply unpopular. SAFE quickly changes the subject to some speculative tax increase on the middle class that is not being discussed.

Katyal describes how difficult it would be for the IRS to enforce this proposal that has not been proposed to tax unrealized gains for everyone. He even uses the decade of IRS underfunding orchestrated by GOP Congresses as more reason to doubt the tax authorities are up to the task.

Of course, it is always possible that Congress will enact legislation that leads to administrative and economic chaos, and Americans may always debate when lawmakers have crossed this line. These debates are politics, and the process to resolve them is democracy. There is nothing in the Constitution that requires the Supreme Court to restrain this democratic process to prevent Congress from enacting whatever legislation SAFE opposes.

SAFE May Blow Up Our Tax System

The chaos that should concern the Supreme Court is the legal chaos that will erupt if it reinterprets the Constitution to codify the policy positions of SAFE. Such a ruling would suggest that many, many existing tax laws that have been on the books for decades are unconstitutional, leading to years of litigation and uncertainty and potentially the unraveling of our tax system.

Many of these provisions block obvious forms of tax avoidance. For example, interest paid on bonds is income subject to tax annually, but what happens if someone tries to avoid this tax by purchasing a bond that pays no interest until it is redeemed after several years? Can the bondholder put off paying tax for years (possibly even forever) by choosing one type of bond over another, even when the income ultimately generated is the same? The tax code has rules that prevent this kind of tax avoidance, but if the Moores convince the Court that income cannot be taxed without realization, these rules may be eventually struck down as well on the same grounds.

Since the late 1960s, special rules have declared that certain types of income that are easy to shift across borders through paper transactions are taxable when reported by American-owned foreign corporations. The logic employed by Katyal and the Moores would call into question these rules as well, potentially opening the floodgates to offshore tax dodging on a scale never seen before.

Even more alarming are the consequences for “pass-through” businesses, which do not pay the corporate income tax because their profits are “passed through” to the individual owners and reported on their personal income tax returns, even when the profits are not actually paid out to the owners but retained by the business. Lawmakers reasoned that these businesses did not need to pay corporate income tax given that their profits would be subject to the personal income tax, but a ruling in favor of the Moores might suggest that they often can be subject to no tax at all.

If they follow the advice of SAFE, the right-wing justices may blow up the consensus on these long-standing tax provisions, not to mention a more fundamental consensus that billionaires should not be able to override the democratic process. Rather than “Saving America’s Family Enterprises,” the group seems focused on demolishing this basic tenet of democracy.


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