President Joe Biden remains determined to raise taxes on the ultra-rich and is looking to plug existing tax loopholes. In particular, this is part of his strategy to get the 1% to cough up the funds needed to pay for his pet programs.
Capital Gains Tax Loopholes
Biden’s plan to plug tax loopholes for the ultra-rich shows up in his plan details. For one, he proposes changes on how to compute taxes on capital gains.
The administration wants to raise the tax on capital gains to 39.6% after the first $1 million. This essentially makes it the same as regular income tax. Combined with the existing 3.8% Medicare surtax on investment income, the new tax totals 43.4%. Except for a short period in 1978, this rate represents the highest tax rate for the rich since the 1920s.
Angel of Death Loophole
However, the government can’t collect capital gains taxes until the asset gets sold. If an asset owner doesn’t sell before dying, there is no capital gains tax due.
Meanwhile, heirs become liable for the tax once they inherit the asset. Known as the Angel of Death loophole, this is so well-known that Goldman Sachs estimates the wealthiest 1% of U.S. households hold as much as $1.5 trillion of unrealized capital gains on stocks alone.
In fact, even if Congress approves the new capital gains tax, government revenues would lose $33 billion over ten years. This is according to the Penn Wharton Budget Model. As a result, the rich would continue to stockpile assets until death.
Now, Biden wants that Angel of Death loophole gone. Under his plan, heirs will owe capital gains tax from the date of original acquisition until death.
Consequently, this removes the incentives for asset owners to hold on to assets to avoid taxes. Instead, they will likely pay off their dues soon as they can.
According to Penn Wharton Associate Director John Ricco, this changes the $33 billion loss into a $113 billion revenue gainer for the government.
If you include the estate tax, Ricco estimates that the federal government could eventually collect 61% of a $100 million capital gain.
Offshore Corporate Tax Loopholes
In addition, Biden is eyeing to lock in more revenue with his proposal to raise corporate from 21% to 28%. He wants to block corporations from shifting profits to countries with lower taxes.
Even as the Biden administration raises the tax rate, the government is meeting with other nations to buy into a global minimum tax rate.
Under a plan in the works with European nations, when tax havens like the Cayman Islands won’t tax a company’s local profits, the country of origin can collect the tax instead. In theory, this removes all incentives for firms to flee to tax havens.
Biden’s Tax Raises Focus on the Rich
Former President Donald Trump got support for his 2017 Tax Cuts and Jobs Act 2017 that reduced taxes for the rich. He did so by including reductions for lower income Americans as well.
In contrast, Biden’s tax hikes mainly focus on Americans earning more than $400,000 a year, with the majority affecting those earning $1 million or more annually.
Instead, Biden is banking on the fact that the tax hikes will go to funding for programs designed for the poor and middle class.
This includes two years of free preschool and two years of free community college, paid family and medical leave, and other credits. He is hoping these are enough to secure votes of Democrats, and maybe win a Republican or two.
Breaking Biden’s Proposals
If Biden gets his wish fulfilled, the onus will fall on the Internal Revenue Service. Critics say that the IRS will drown in a sea of information as they set about to collect bank account data from taxpayers to assess due to capital gain taxes.
At the same time, families with assets may only need to outlive the Biden administration. Once a Republican president gets elected, it’s a matter of time before the government removes these tax measures.
Right now, the opposition to Biden’s plan is coming out guns ablaze. Biden’s plan is a “liberal wish list.” according to Senate Minority Leader Mitch McConnell (R-KY). Edward Yardeni, president of Yardeni Research Inc, said that “the 1 percent is paying more than 40% of federal income taxes. Isn’t that enough?”
Watch the Bloomberg: QuickTake video reporting that America’s ultra-rich fear Biden will close their favorite tax loopholes:
Do you agree with Biden’s proposals to tax the ultra-rich to fund programs for lower income Americans? Do you agree with his plans to close all loopholes that prevent the rich from paying bigger taxes?
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