Tuesday, October 19

Jack Mintz: Biden sells twisted fiscal concepts


Biden has a flair for poorly thought-out proposals, including blessing the billionaires’ capital gains tax

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As big spending packages move through the US Congress this week, President Joe Biden is selling twisted fiscal concepts. To him, his package is just dandy as “it pays for itself,” by which he means that a federal spending binge will not increase the deficit, which seems unlikely. But even if that were the case, Americans who face higher taxes or prices due to ramped-up spending may not be as blithely unconcerned as the president apparently is.

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Biden has proposed two spending plans that add up to $4.5 trillion over 10 years (all values ​​in US dollars): the $1.8-trillion American Families Plan and the $2.6-trillion American Jobs Plan. The latter includes a trillion-dollar infrastructure bill that the Senate has passed but which is now languishing in the House of Representatives, where Democrats don’t want to approve it until the Senate agrees to the remaining $3.5 trillion.

The Democrats are using the parliamentary tactic of “reconciliation” for the $3.5-trillion package so that only 50 senators plus Vice-President Kamala Harris, rather than 60 senators (including 10 Republicans), are needed to pass the bill. Reconciliation requires budget balancing , so to make all the spending “pay for itself” the Democrats are proposing new taxes, including higher rates of tax on personal income and capital gains ($755 billion) and corporate income ($2.1 trillion), as well as more zealous tax administration ( $720 billion).

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As many observers have noted, reconciliation budget-balancing often hides legislation’s true cost. For example, a proposed $600 increase in child allowances goes only to 2025, while dental benefits are delayed until 2028. Given the strong likelihood that most new programs won’t be cancelled but will continue indefinitely, the Committee for a Responsible Federal Budget estimates the package’s true 10-year cost will be at least $1.5 trillion more than the official number.

President Biden stresses that no one with less than $400,000 in family income will pay higher taxes under his package. Well, not quite. Climate-change mandates and tighter tax administration will hit all Americans, while corporate tax hikes, which account for the lion’s share of new revenues, will raise consumer prices, lower wages and kill some jobs. The Congressional Budget Office estimates that at a quarter of corporate taxes will be paid by workers, mostly low- or middle-income. But the former head of the President’s Council of Economic Advisors, Kevin Hassett, and Boston University economist Larry Kotlikoff think the loss to workers will equal the entire amount of corporate tax raised — even if capital owners, many of whom are not rich but simply belong to company pension plans, are also hit by lower stock values.

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To help pay for the president’s package, the Democrats have been struggling with capital gains taxes. One proposal is to raise the capital gains tax rate from 20 to 25 per cent, which the final package likely will end up doing. But because of resistance to the idea of ​​deemed realization of capital gains at death, which the president had also suggested, the Democrats last week came up with a new idea: tax unrealized capital gains. Billionaires would be hit with capital gains taxes even if they had not sold their assets . For example, if a person’s net worth rose from $2 billion to $2.5 billion, he or she would owe $125 million (assuming a 25 per cent tax rate) on the $500 million capital gain. The tax would equal 6.25 per cent of their net wealth.

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In some ways, this new tax is similar to the net wealth tax that has now disappeared off the political radar screen. On the other hand, if a billionaire were to lose money, which is easily possible in a recession, the net wealth tax would still be owing. Not so with taxing unrealized capital gains: if asset values ​​fell, no taxes would be owing. Of course, good economics says that if wealth-owners do suffer capital losses, they should get tax refunds if the loss can be carried back against past taxes on income or capital gains, as it should be. No one is proposing that, however.

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It did not take long for President Biden to bless the billionaires’ capital gains tax, though perhaps without realizing its pitfalls, including that many people might have to sell assets to pay their tax, thus potentially compromising their controlling interest in their own firm. Some assets are easily liquidated, but not farmland or private corporate stock. Which raises the deeper question: what is the unrealized gain of an asset that is not traded and therefore hard to value?

In 1983 Pierre Trudeau’s government proposed taxing unrealized capital gains. The “Indexed Security Investment Plan” required taxpayers to pay tax on the unrealized gains of traded assets, net of an inflation adjustment. Though it was optional it was highly controversial: paying tax without having the cash to do so was not very appealing to most investors. Conservative Finance Minister Michael Wilson wisely dropped ISIP in the 1985 budget after little take up.

Biden has a flair for poorly thought-out proposals. It got him into deep trouble in Afghanistan. His fiscal prowess is little better.

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