"Biden's new death tax hits the middle class while excluding certain wealthy investors," notes Reason magazine. The proposed death tax, contained in Biden's "American Families Plan," is discriminatory, treating "individuals with identical net worths very differently."
Biden's plan would impose the capital gains tax on people's estates (when they die), while almost doubling the current capital gains tax rate.
"With a major exception for large investors, it would make these changes without grandfathering existing unrealized capital gains," Reason says. For example, a "single person with a reasonable mortgage" could "have her residence's value eaten away by the new tax" upon her death.
Reason gives the example of a widow who has owned a New York City apartment, her only major asset, for 40 years. Her estate would end up paying a tax of $220,000 on that apartment upon her death, even though she has never made anything close to $400,000 a year, and Biden promised in 2020 not to raise taxes on anyone making less than $400,000 per year.
Like virtually all homes in New York City, the widow's apartment has increased in value, especially since her husband's death in 1981. And like many widows, she refinanced her apartment to pay for her children's college educations and weddings. Today, the apartment she and her husband purchased for $200,000 has a market value of $2,000,000. She also has a mortgage of $1,500,000. That leaves an estate worth $500,000.
But Biden's proposed 40 percent capital gains tax at death would result in a tax of $220,000 on the increased value of the apartment, after taking into account certain exclusions contained in the "American Families Plan." Her children's inheritance would be reduced as a result from $500,000 under current law to $280,000 under Biden's plan.
Under Biden's plan, the maximum federal rate on capital gains would go up from 23.8 to 40.8 percent. Taxpayers would exclude $250,000 ($500,000 for couples filing jointly) on gains from a home sale. At death, there would be an added exclusion of $1 million of capital gains ($2 million for married couples).
Reason says "Current law bars anyone with less than $11.7 million in net worth from paying any death taxes. Today, this means that $11.7 million can be passed along to family members without any reduction. But Biden's plan would subject taxpayers with a net worth far lower than $11.7 to a death tax. This levy would allow no deduction for any debt," such as a mortgage. By contrast, Biden's plan would exempt from capital gains tax sales of qualified small business stock in C corporations, which is almost always held by wealthy people.
This new death tax would cover only part of the massive $1.8 trillion cost of Biden's American Families Plan. An analysis from the University of Pennsylvania says Biden's plan would increase the national debt by $1 trillion, since its true cost is $2.3 trillion, not $1.8 trillion, while Biden’s tax increases to pay for it would only raise $1.3 trillion. That’s because some of Biden’s tax hikes would reduce, rather than increase, federal tax revenue, by discouraging economic activity that yields tax revenue. For example, Forbes notes that Biden’s proposed increase in capital gains tax rates could actually increase the budget deficit, shrink tax collections, and harm medical innovation:
One analysis out of the Wharton Business School at UPenn found that raising the capital gains rate could actually lower federal tax revenue by $33 billion between 2022 and 2031. That analysis dovetails with findings from the Tax Foundation, which said the policy would cost the Treasury $124 billion over 10 years…..higher taxes could imperil the creation of new business, which is especially troubling since there are fewer startups than in the past. “The doubling of taxes would hurt the returns on private investment into venture capital and private equity funds,” said Mace McCain, chief investment officer at Frost Investment Advisors. “These funding sources have been a primary source of funding for new drug discoveries and technology innovation.”
Other Biden proposals, such as his $2.3 trillion infrastructure package, would also increase the deficit. Biden is proposing large tax increases to fund his infrastructure package, such as raising the corporate tax rate to 28% from 21%. But raising the corporate tax rate could backfire, by driving companies overseas to the many countries with lower tax rates. That would result in them paying corporate income tax to foreign countries, not America. So the tax increases contained in Biden's infrastructure package would not cover its projected cost.
President Biden has proposed a record $6 trillion budget that “would push federal spending to its highest sustained levels since World War II” as a share of our economy, according to the New York Times. The Biden Administration “forecasts deficits at more than $1 trillion for at least the next decade” if his budget plan is adopted, notes CNN. Biden wants to increase the federal budget by more than 20% in a single year, which is the fastest peacetime increase in spending ever, at a time of record budget deficits.
Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law. He also once worked in the Education Department.