Capital Gains Tax Changes in the Reconciliation Bill

Because Democrats are trying to incorporate the president’s American Families Plan into their $3.5 trillion reconciliation bill, Americans should be happy that it’s having such a devil of a time getting through Congress. Biden’s “plan” is to raise taxes, and not just by upping tax rates, but also by changing how and when taxes are collected. The proposed changes to the capital gains tax are supposed to target only the super-wealthy, but that’s also how the income tax was sold, and we know how that went.

On April 28 the White House released a fact sheet that outlines the American Families Plan and its designs on your money. The fact sheet is rather lengthy, but the part that deals with capital gains is conveniently located at the very bottom of the webpage under this heading: “End capital income tax breaks and other loopholes for the very top.” Only the first paragraph of this section deals with taxes on capital gains; here’s how it ends:

The President’s plan will close this loophole, ending the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity. The reform will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business. Without these changes, billions in capital income would continue to escape taxation entirely.

Maybe those billions should “escape taxation entirely.”

Democrats, progressives, and other socialists think a stepped-up basis is a loophole. That’s because they think everything is, or at least should be, taxable. Notice that the exclusionary amount (as low as $1M) would include estates that are clearly middle class.

At Forbes on July 27, Bruce Brumberg touched on capital gains. The third section deals with Biden’s proposed treatment of capital gains for gifts and estates and it’s sobering. Heretofore, inheritances have been given “stepped-up basis,” allowing an heir to reset a property’s basis when it’s received. That way an heir would not have to pay for an accrual in the worth of a property that occurred before he inherited it. I’ll retain Brumberg’s bold type:

Alert: This does not mean that the basis for the remaining stock over these amounts is just carried forward to the person(s) inheriting it or the beneficiary, as has been misreported in some sources. Death itself triggers the recognition of capital gains tax on these amounts as if the stock was sold!

In other words, if this new treatment of capital gains finds its way into the reconciliation bill and becomes law, heirs will have to pay taxes on inherited assets in the year they receive them, even if they want to keep the assets. But, if they do decide to sell inherited assets, and the price has gone down; will the IRS allow them to claim a deduction?

On September 13, National Taxpayers Union Foundation ran “What’s the Deal With Capital Gains Taxes?” by Andrew Wilford, who asserts that “proposed changes to capital gains tax rates thus far floated for inclusion in the budget reconciliation bill are likely to do economic harm outweighing whatever revenue they would raise” and would “entail gargantuan administrative challenges.”

Wilford’s “Ending the Step-Up in Basis” section is especially worth reading. He contends that stepped-up basis “exists in large part to shield taxpayers from other flawed portions of the tax code,” such as the “lack of indexing for inflation.” Stepped-up basis shields an heir “from having to pay a tax bill on an asset that, though it nominally appreciated in value, is actually worth less in real terms than it was when it was purchased,” due to inflation:

Take the example of a person who buys stock at a value of $10 a share in 1970. Upon his death in 2000, the stock was worth $30 per share… the stock share’s growth has actually not kept up with the pace of inflation, since $10 in 1970 was worth about $45 in 2000. Thus, the [$20] “appreciation” in the stock price in the 30 years between 1970-2000 was in fact a real loss [of $15] per share, after accounting for inflation.

Rather than paying taxes on a $20 gain in the price of each share of stock, an heir should be able to claim a $15 loss in the real value of each share. Democrats are so grasping that they actually think they should be able to tax capital gains that are “unrealized.” The Dems don’t think they should have to wait for properties to be sold before they get their cut.

On September 29 at The Corner, Andrew Stuttaford wrote about unrealized increases in value and how they can be “ephemeral.” And, if the price of a stock is down when one finally sells it, is the IRS going to refund all the capital gains taxes collected in the years when there were unrealized profits?

Biden and the Democrats are going in precisely the wrong direction on taxes. Instead of simplification, they’re going for complication. And they’re seeking to bolster the IRS with thousands of new “enforcers.”

The reason Congress might get away with such confiscatory taxation is that middle-class Americans have been beaten down so badly over the last 40 years that they don’t have any skin in the game; they know the capital gains tax won’t affect them. If they had capital to leave to their kids, they’d care about taxes.

Why should capital gains taxes hit real estate at all? After all, owners of houses, farms, and ranches pay real estate taxes every year. And if the assessed value goes up, they pay more in taxes. Say you have a substantial old stone house that’s been in the family for generations and naturally you plan to pass it down to your firstborn when you croak because, for you, family is everything. Well, too bad, pal; Congress needs your money and is gonna “wet its beak.” Your heirs will have to pony up, pay their “fair share,” do “what’s right,” (whatever that is).

The reconciliation bill is not yet complete and we don’t know what tax changes of Biden’s American Families Plan will survive. The whole bill should go down, and for many more reasons than the way it treats taxes. To find out more about what the Biden people want to do about capital gains, refer to page 61 of this PDF from the Treasury Department. Bon appetit!

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.

Image: Blue Diamond Gallery

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