When a new party comes into the White House, with control of Congress, it raises or lowers federal taxes according to its priorities. President Biden has laid out ambitious spending plans and expects to pay for a portion of it with increased tax revenues. Income taxes and capital gains taxes are obvious targets, although the President has pledged not to raise income taxes for people earning less than $400,000 per year.
Debate is underway about how to change the tax laws. Many factors play into the decision-making, including interest rates and their impact on the cost of servicing the federal debt, the strength of the economy and its ability to generate tax revenue, and even the looming midterm elections. Through the taxation debate, I hope lawmakers will tread carefully in three important areas.
First, increases in the corporate tax rate impact real people. Sometimes pundits propose that taxes on corporations don’t affect people. No corporation, however, makes money without people. Raising the tax obligation on a corporation puts an increased burden on the corporation’s employees, customers and shareholders. The additional tax money comes from somewhere and a lot of people who earn less than $400,000 a year will feel the impact.
Second, the inheritance tax breaks up family businesses and farms. An increase in the inheritance tax will break up more businesses and farms, especially if the step-up in basis rules are changed in an effort to capture more tax. As it is, the tax bill that accompanies an inheritance often requires the sale of assets; substantial increases in the rates just mean fewer family businesses will make it from the current generation to the next. We do not help our economy by breaking up going concerns that provide employment and steady income tax revenue. Keep in mind that money used to create or purchase these assets has already been taxed. In terms of a corporation paying dividends, the inheritance tax doesn’t just represent double taxation, but triple taxation.
And third, bankers should not be pulled into the federal government’s effort to collect more taxes. There is broad consensus that the government should be collecting more of the taxes it is owed. So, some lawmakers are mulling over plans to require banks to file reports which detail deposit and withdrawal activity of high-balance customers. That would put bankers in a terrible position, in addition to substantially increasing their compliance burden. Don’t ask bankers to be agents of the IRS.