Increases in taxes on personal income, small businesses and corporations, savers and investors, smokers and vapers — it’s all in there.
Increases in taxes on personal income, small businesses and corporations, savers and investors, smokers and vapers — it’s all in there.
T he tax-writing House Ways and Means Committee’s Democratic majority on Sunday night released $3.5 trillion of new or higher taxes on American workers, business owners, and savers. This package of tax increases is intended to pay for the spending explosion that House speaker Nancy Pelosi (D., Calif.) and Senate majority leader Chuck Schumer (D., N.Y.) have planned (the budget resolution bill written by Senate Budget Committee chairman Bernie Sanders of Vermont). Whether it will pass muster with vulnerable House Democrats or in-cycle Senate Democrats (each of these groups is up for reelection in less than 14 months), to say nothing of the ever-skeptical Senate Democrats Joe Manchin of West Virginia and Kirsten Sinema of Arizona, is another matter entirely.
What does this $3.5 trillion tax increase do, and how would it impact your life?
To start with individuals, the top income-tax rate rises from 37 percent today all the way to 46.4 percent under the plan. This odd number is arrived at by hiding the ball (an old trick in this game dating back to Obamacare and before). There are to be three separate taxes on higher-income individuals: a 3.8 percent tax on those making more than $200,000 per year; a 39.6 percent income tax on those making more than $400,000 per year; and a 3 percentage-point income surtax on those making more than $5 million per year. Add these all up, and you get to a top rate of 46.4 percent.
This would be the highest top personal income-tax rate Americans have faced since before the 1986 Tax Reform Act lowered the rates and broadened the base (only this time, the base is still broad so the rate will hurt a lot more).
This 46.4 percent tax rate is the one most commonly applied to the profits of successful small and medium-sized businesses organized as partnerships, Subchapter-S corporations, LLCs, etc. These latter firms also take a hit in that their ability to exclude up to a fifth of their profits from taxation (a bit of welcome relief in President Trump’s “Tax Cuts and Jobs Act”) is capped under the House Democrats’ tax increase.
The all-important capital-gains tax rate rises from 23.8 percent today to 31.8 percent under the plan. Again, those numbers are unusual because the capital-gains tax is today two separate taxes applied to the same income. A capital-gains tax rate of 31.8 percent would be among the highest levels we have ever imposed. The only period with a higher capital-gains tax rate was the 1970s — a period of inflation, national humiliation as our helicopters escaped from a quagmire by surrendering it to the enemy, and soaring gasoline prices. So maybe the rate is appropriate, after all.
What a high capital-gains tax rate could do is cause the value of stocks to be reevaluated on an after-tax basis. If the tax on stocks rises, the value of stocks after taxes necessarily falls. That means even if you own all your stocks in mutual funds, and those mutual funds are tucked away in your 401(k), your Roth IRA, and your kid’s 529 plan, you’re not exempt from the damage a higher capital-gains tax could bring.
Speaking of your IRA, the tax bill puts an accumulation cap of $10 million on your retirement savings. After that, you can’t save any more inside tax-neutral savings accounts.
A high capital-gains tax also means less dynamism in our jobs-creating entrepreneurial economy. When one company is bought out by another company, the tax the seller pays is the capital-gains tax. When facing such a high tax wedge, plenty of companies that were going to be bought and sold won’t be — and that’s bad for creative gales of productivity and innovation. Your next iPhone just got dumber.
Another hit on savers and investors is a big hike in the death tax. Instead of being able to shield up to $24 million of assets from the 40 percent death tax, family businesses (which overwhelmingly bear the death-tax burden) will be able to exclude only as little as $6 million. This is a huge hit that will require family farms and others to once again hire an army of actuaries, insurance agents, accountants, and other assorted ghouls of the death-tax avoidance industry. This happens almost immediately, on New Year’s Day 2022.
The Democrats in this tax plan for the first time impose a confiscatory 95 percent tax on prescription medicines. That isn’t a typo — they create a 95 percent tax on the top 250 drugs on the market, plus all forms of insulin. That would immediately double the price of every drug we take, or our parents and grandparents need to survive. The only way out of this 95 percent tax is to submit to a government-imposed price control, which will inevitably lead to shortages of drugs at your local pharmacy and in turn government rationing.
We haven’t even gotten to the biggest tax hike, on corporations. The Democrats’ tax plan increases the corporate income-tax rate from 21 percent to 26.5 percent and also greatly increases taxes on corporate profits earned overseas. These two changes will mean that the bad old days of outsourcing and corporate inversions that the Tax Cuts and Jobs Act effectively ended will come roaring back. The “giant sucking sound” you hear will be your company getting acquired by a firm in a country with lower taxes than ours.
The federal corporate-rate hike on paper doesn’t do justice to the damage. When state corporate rates are included (as one must do when making international comparisons, because some countries have states and some don’t), the “true” rate rises from just under 26 percent today to 31 percent under the tax hike. Once again, our corporate income-tax rate would be nearly the highest in the developed world, trailing only Portugal (31.5 percent), and far above the developed-nation average. We would have a higher corporate income-tax rate than every single one of our major trading partners — Canada, Mexico, Japan, the United Kingdom, Germany, and even France would beat us in the tax-rate competition for global capital and jobs. We would be well above the Chinese business-tax rate of 25 percent.
There’s a hodgepodge of other tax increases, too. In order for capital gains derived from management of an investment partnership (“carried interest”) to qualify for the capital-gains tax rate, partnership assets must be owned for at least five years (it’s currently three years). This will present a barrier to entry for new investment partnerships and hurt defined-benefit pension funds that rely on these enterprises to help pay retirees.
The bill includes a tobacco-tax hike, and for the first time the tobacco tax is imposed on vaping products. Millions of Americans use vaping products to try to quit smoking, so slapping a giant tax hike on them is especially bizarre for a party so concerned about public health. It goes without saying that this tax increase directly violates President Biden’s oft-repeated pledge not to raise taxes on anyone making less than $400,000 per year (other tax hikes indirectly violate it).
There’s a retroactive tax increase on those who donated land via a “conservation easement” — many people who did so and took a legal tax deduction at the time will have to amend their 2016, 2017, 2018, 2019, and 2020 income-tax returns. They will have to pay steep taxes, penalties, and interest. They will have to try to undo any 2021 donations already made. And because these grants are perpetual, taxpayers probably won’t get the land back that they donated.
House Democrats on Monday announced that they are interested in cutting taxes on millionaires and billionaires by uncapping the state and local income tax (SALT) deduction. Under the Tax Cuts and Jobs Act, this deduction is limited to $10,000 per tax return. By uncapping the SALT deduction, congressional Democrats would be giving a giant windfall tax cut to high-income taxpayers (that is, party donors) in blue cities and states — a giveaway so craven that even liberal tax experts blush at the idea. Thus, the Democrats have inverted the very principle of good tax reform — they have raised the rates and narrowed the base.
The final cherry on top of this distasteful dessert is $80 billion over the next decade for the IRS to hire an army of new tax auditors. Overwhelmingly, the new audits this will generate will fall on unwitting small-business owners. The pointy-headed think-tankers and government bureaucrats who fetishize these audits to close the so-called “tax gap” have never run a business themselves, so they generally think that business owners are a bunch of tax cheats. By way of contrast, I have prepared income-tax returns for real-world small-business owners for nearly two decades. The last thing they want is to get cute on their tax returns and invite IRS scrutiny. This bill gives honest businessmen nowhere to hide from the tax man.
The combined impact of this $3.5 trillion tax increase — personal income-tax hikes, small-business and corporate tax increases, taxes on savers and investors, taxes on smokers and vapers — would probably stall the COVID economic recovery and would definitely impact your financial life. The most pro-growth thing we could do for the rest of the year is kill this tax increase.