Inflation And Taxes

On Wednesday, Steven Hayward posted an article at Power Line Blog about President Biden’s tax proposal that would only ‘tax the rich.’ Taxing the rich has never been a really good idea–the ‘rich’ have tax accountants to limit their tax liability. Generally speaking, the middle-class does not have tax accountants and gets stuck paying the taxes that were for the ‘rich.’

The article reports:

Everyone is familiar with the two great lies of modern times: the check is in the mail, and “Of course I’ll still respect you in the morning.” To which should be added a third: “wealth taxes” will only affect the very rich—the middle class has nothing to fear. When you hear Democrats say this, reach for your wallet.

This needs to be kept in mind with thinking about President Biden’s new proposed “wealth tax,” which would impose a 20 percent tax on unrealized gains of liquid assets (i.e., stocks and bonds) for households with a net worth of more than $100 million. The Biden Administration claims this proposed tax will only hit the top 0.01 percent of taxpayers, with most of the incidence of the tax falling on billionaires.

Of course, this is what liberals told us about the Alternative Minimum Tax (AMT) back in the late 1960s, when the left created a scandal around the fact that 155 people with adjusted gross income above $200,000 paid zero income tax on their 1967 tax returns. (Adjusted for inflation, that would be around $1.5 million today.) As the internet clickbait headlines like to say, “You’ll never guess what happened next!” Of course you don’t need to guess: by 2017, before the Trump tax cut finally scaled back the AMT (but only temporarily because of our strange budget rules), 5.2 million households were caught up in it, a far cry from the few hundred originally targeted in 1969.

The same thing will surely happen with any “wealth tax” targeted at the super rich, and for the same reasons: inflation, and the insatiable appetite of liberals for revenue, which can only come in sufficient amounts by taxing the middle class. Devices like the AMT or a “wealth tax” are gimmicks to disguise this fact.

The article notes:

Thomas Hoenig of the Mercatus Center at George Mason University (and former president of the Federal Reserve Bank of Kansas City) warns in Barron’s:

The proposal sounds so simple. Report income and unrealized gains in liquid assets and tax them at a minimum of 20%—the assumption being that only the richest experience significant increases in asset values. However, the truth is that in a period of persistent asset inflation, which we have had now for decades, such a tax eventually would apply to an ever-larger proportion of the population, notably the middle class.

The income tax is a good example of how a tax on the wealthy becomes a tax on the middle class. In 1913, Congress passed the first income tax under the newly passed 16th Amendment to the Constitution, which topped out at 7% for income above $500,000. After a temporary, significant tax increase to pay for World War I, tax rates settled in at 25% on incomes above $100,000. It was only a matter of time before the politicians forgot about the “wealthy” part.

Taxing the rich is one of those ideas that sounds really good but never actually works!

Does Your Government Work For You?

Yesterday The Washington Times posted an article about President Biden’s $1.75 trillion expansion of the federal safety net.

The article reports:

An analysis by the Tax Foundation, a nonpartisan fiscal watchdog, estimates that President Biden’s $1.75 trillion expansion of the federal safety net could kill more than 103,000 jobs over the next decade and add $750 billion to the federal deficit.

The estimate is based on a thorough analysis of the White House’s spending “framework” and the corresponding 1,684-page bill text released by House Speaker Nancy Pelosi, California Democrat. Experts from the Tax Foundation say the proposal would fall far short of White House promises.

“We estimate that the House bill would reduce long-run economic output by nearly 0.4% and eliminate about 103,000 full-time equivalent jobs in the United States,” the experts wrote. “It would also reduce average after-tax incomes for the top 80 percent of taxpayers over the long run.”

It should be shouted everywhere that according to a CNBC article posted in August 2021, more than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a report from the Tax Policy Center. Think about that for a minute. If you are not paying taxes, why should you care how much the government is spending or how much the government is planning to raise taxes? This is not a good situation.

The article at The Washington Times concludes:

Mr. Biden is backing a 5% “wealth tax” on those with adjusted gross income above $10 million. The figure jumps to 8% on adjusted gross income over $25 million.

“I can’t think of a single time when the middle class has done well but the wealthy haven’t done very well,” Mr. Biden said. “I can think of many times, including now, when the wealthy and the superwealthy do very well and the middle class doesn’t do well.”

Despite the rhetoric, Tax Foundation economists say, the provisions would affect all workers by killing more than 29,000 jobs.

The White House did not immediately respond to requests for comment. 

The report was released one day after Sen. Joe Manchin III, West Virginia Democrat, accused his colleagues of engaging in “budget gimmicks” to hide the true cost of the spending package.

“As more of the real details outlined … what I see are shell games and budget gimmicks that make the real cost of this so-called $1.75 trillion bill estimated to be twice as high,” he said. “That is a recipe for economic crisis. None of us should ever misrepresent to the American people what the real cost of legislation is.”

Actually, the middle class did very well during the Trump administration. Trump administration policies helped increase the number of Americans in the middle class.

Does anyone remember the Luxury Tax of 1990.

On September 10, 2011, The American Enterprise Institute posted the following:

Flashback:Wall Street Journal editorial on January 6, 2003

“Most Americans celebrated as the ball fell in Times Square New Year’s Eve. But for auto dealers this new year is especially sweet. January 1 marked the expiration of the federal luxury tax on cars, the last vestige of the destructive luxury tax package in the infamous 1990 budget deal.

Starting in 1991, Washington levied a 10% luxury tax on cars valued above $30,000, boats above $100,000, jewelry and furs above $10,000 and private planes above $250,000. Democrats like Ted Kennedy and then-Senate Majority Leader George Mitchell crowed publicly about how the rich would finally be paying their fair share and privately about convincing President George H.W. Bush to renounce his “no new taxes” pledge.

But it wasn’t long before even these die-hard class warriors noticed they’d badly missed their mark. The taxes took in $97 million less in their first year than had been projected — for the simple reason that people were buying a lot fewer of these goods. Boat building, a key industry in Messrs. Mitchell and Kennedy’s home states of Maine and Massachusetts, was particularly hard hit. Yacht retailers reported a 77% drop in sales that year, while boat builders estimated layoffs at 25,000. With bipartisan support, all but the car tax was repealed in 1993, and in 1996 Congress voted to phase that out too. January 1 was disappearance day.

The end of any federal tax is such a rarity that it’s well worth celebrating. And the luxury tax lesson of economic damage is worth keeping in mind as politicians begin to wail that President Bush’s new tax proposals aren’t punitive enough on the rich.”

HT: Pete Friedlander

The recession that followed the 1990 luxury tax cost President George H.W. Bush re-election. The Democrats might want to keep that in mind.

 

Who Gets Taxed

Somehow those making or changing the tax laws always seem to be able to write them in a way that does not increase their own taxes. Well, it;s happening again.

Yesterday (updated today) The U.K. Daily Mail posted an article about President Biden’s idea for increasing the revenue from capital gains taxes.

The article reports:

President Biden has promised not to raise taxes on anyone earning less than $400,000 but plans to end an inheritance loophole could do just that, according to a new analysis that suggests a widow with nothing to pass on to her children but her home could be badly hit by proposals that would leave the Bidens’ personal fortune untouched.

Tucked away in Biden’s American Families Plan is a revision to the way capital gains taxes are paid on estates when people die.

Critics have dubbed it a ‘middle-class death tax’ and say it will mean thousands of people having to sell assets to meet tax bills they would not get under existing law.

‘The American Families Plan as proposed would impose a new death tax that would punish middle class individuals who chose to invest in America and leave something for their children rather than spend every dollar, said Hank Adler, associate professor at Chapman University and co-author of the new study.

‘The plan does not move the goal posts, it totally changes the rules of the game.’

The article explains how the current tax system works and what President Biden proposes to change. On the surface it looks as if the taxes would only apply to the rich, but when you look into it, middle class families would also be negatively impacted.

The article explains:

At present, capital gains tax is generally imposed on profits when assets are sold.

But for estates worth more than $11.7 million the tax is imposed on what are called ‘unrealized gains’ – that is the increase in value of homes, shares and other assets even if they are not sold.

That means estates worth less than that can be passed on and the increase in home value is reset, so the beneficiary is taxed only when they sell that asset and only on the increase after they inherited it.

Biden last month called this the ‘trust fund loophole.’

‘We need to make a choice to eliminate the loophole,’ he said.

How quickly do you think the value of an estate could be moved down to $1 million or so–a number that in some of our major cities would mean owning a house, a car, and a relatively small stock portfolio. This tax would hit hard to people who have lived in the same house all their lives and had the value of the house increase significantly due to inflation. However, for people like the Bidens, there would be little additional tax because they bought their properties fairly recently. Therefore they would not pay significant tax on their property.

The article notes:

They built their Wilmington, Delaware, home on land bought for $350,000 in 1996. It is now estimated to be worth $2 million.

Their Rehoboth Beach house, also in Delaware, cost $2.7 million in 2017.

That means the total appreciation is likely to be less than the $2.5 million couple’s exemption.

And their estate would pay nothing. 

Meanwhile, a New York widow who had lived in the same house for fifty years would leave her children a house and a ridiculous tax burden:

Suppose a widow buys a house in New York for $250,000 in the 1970s.

She never remarries and by the time of her death her only asset is the home.

She leaves her house, now worth $2.5 million, to her children.

Under current law, the estate faces no capital gains tax.

Her children inherit the house at a value of $2.5 million and would only pay capital gains on its sale.

Under Biden’s proposals, the estate would be subject to capital gains tax.

Its increase is $2.25 million, less a $1.25 million exemption, leaving a taxable amount of $1 million.

At 40.8% that would bring a $408,000 tax bill.

Somehow those making the tax laws always seem to be able to avoid paying more taxes.

 

Tax And Spend From The Biden Administration

Breitbart posted an article today about President Biden’s plan to raise taxes on Americans to pay for an infrastructure plan.

The article reports:

President Joe Biden plans to propose a tax on American businesses at a higher corporate tax rate than Communist China charges American businesses.

Biden will travel to Pittsburgh Wednesday to present a 2.25 trillion dollar package that would, if passed into law, increase the corporate tax rate from 21 percent to 28 percent, outdoing Communist China’s corporate tax rate of 25 percent, just after former President Trump lowered the tax from 35 percent to the current 21 percent.

The lesson that the President should have learned from the Trump administration’s corporate tax cuts is that when you cut the corporate tax rate, businesses come back to America. Increasing the corporate tax rate will drive American businesses overseas and will result in more unemployment for Americans.

The article concludes:

The top Republican on the House Ways and Means Committee, Rep. Kevin Brady (R-TX), also condemned the plan due to the United States remaining in an economic crisis. “No president has ever raised business taxes to recover from an economic crisis. This couldn’t come at a worse time,” he said.

Ann Wagner (R-MO) agreed. “Why, as this country begins to reopen and recover economically, would the Biden administration be proposing tax policy which would, in the end, hurt the American family and millions of struggling small businesses?”

Senate Minority Leader Mitch McConnell (R-KY) said on March 16 that Republicans would not support tax increases to pay for infrastructure. “I don’t think there’s going to be any enthusiasm on our side for a tax increase,” he said.
Breitbart News reported the bill also “includes $300 billion for housing, $400 billion for elderly and disabled care, and $300 billion to revive manufacturing in the United States.” Additional expenditures incorporate high-speed broadband internet upgrades, electric grid modifications, and water systems maintenance. The proposal will also involve “nearly $400 billion in ‘clean-energy credits’ to promote ‘green’ energy such as wind and solar.”

If you were really interested in reviving manufacturing in America, you wouldn’t raise the corporate tax and end energy independence. This bill is not about what it says it is about.