PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Death and Higher Taxes: Biden’s Massive Blow to Small Business, Investment and Wealth Creation

By at 12 May, 2021, 9:02 am

 

by RAYMOND J. KEATING-

The Biden tax agenda amounts to a comprehensive attack on business, investment and wealth creation, and therefore, it also is an assault on entrepreneurship and American workers.

President Biden and his administration emphasize the notion that since they are directly raising taxes on businesses and those earning more than $400,000 a year that somehow there will be no negatives for the economy.

Of course, that’s politics talking, not economics.

Higher Taxes Means Reduced Capital for Small Business Investment and Growth

Quite simply, if you raise taxes on higher incomes, the results feature altered incentives and decisions by such income earners, along with reduced dollars in their hands. That means investments in new and expanding businesses are discouraged and reduced, while more resources accumulate in political hands to be redistributed according to political incentives.

No matter how much those on the Left and in the White House might wish it were not the case, the reality is that the incentives and knowledge deficiency in government guarantee that dollars drained from the private sector to be spent by government will generate serious inefficiencies. All of this combines to restrain economic, income and employment growth.

The same, naturally, goes for increased taxes on businesses, with Biden proposing to increase the corporate tax rate from 21 percent to 28 percent, and the top individual income tax rate from 37 percent (or 40.8 percent with Medicare tax) to 39.6 percent (or 43.4 percent). The obvious results are reduced incentives and resources for expanding the business.

Massive Increase in Death Tax – A Death Sentence for Family Businesses and Farms

A favorite levy of the class warfare set is the estate, or death, tax. After paying a lifetime of taxes and fees, government shows up at death to grab a chunk of an individual’s assets. In fact, the top federal death tax rate is 40 percent, and applies to estates worth more $11.7 million.

But while Biden called for increasing the estate tax on the campaign trail, some think that his latest tax plan did not include an increase in taxes at death. Well, that’s not exactly true. Biden has proposed a dramatic change in the capital gains tax applied at death, which, in turn, would dramatically increase the overall tax rate faced at death.

Consider that Biden would impose both the estate tax and the capital gains tax at death. Currently, and what has long been the normal case, imposing both taxes at death was avoided. So, tax law generally has allowed for a “stepped-up basis” for assets transferred at death, so that they were not hit by the capital gains tax and the death tax. The stepped-up basis means that the capital gains basis for an inherited asset is stepped up to the fair market value at the time of the original owner’s death.

But the Biden plan would tax unrealized capital gains at death. For good measure, Biden has proposed a dramatic increase in the capital gains tax – from 20 percent plus the 3.8 percent tax for a total of 23.8 percent to the top ordinary tax rate of 43.4 percent on gains worth more than $1 million.

So, let’s consider the example of a small business valued at $52 million at the owner’s death after an initial investment of $12 million. The $40 million capital gain would be taxed at 43.4 percent, for a liability of $17.36 million. The remaining $34.64 million in assets, after the $11.7 million exemption, would be taxed at 40 percent, for an additional tax bill of $9.18 million.

That’s a total tax bill of $26.54 million, or a total tax rate of 51 percent.

For good measure, factor state taxes and inflation into the equation (capital gains are not adjusted for inflation), and the real total tax rate would be pushed even higher.

Of course, there are many small businesses that could be viewed as “asset rich,” and yet not have the cash flow to pay such an enormous tax bill. For good measure, this massive government tax grab can come at a particularly vulnerable time, i.e., at the owner’s death. The death tax already can be a death sentence for small businesses, and this Biden proposal would only terminate more enterprises.

And keep Biden’s campaign pledge to increase the estate tax in mind. That creates more tax uncertainty and concern for what might still be coming.

The total tax rate would vary by circumstances, but the government grabbing somewhere around half – or more – of assets at death would be a major hit for small businesses and investors, and serve as an obvious disincentive to investing in businesses, as well as serving as an incentive to sell a business.

Investing in new and expanding businesses, and, for example, in the stock market – a critical vehicle by which businesses raise capital to innovate and build – are positives for the economy. The ills of raising taxes on such investments certainly are not limited to only upper-income earners. Indeed, the bad news would be widespread, restraining economic, income and job growth.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

News and Media Releases