Death and higher taxes: Biden plan an attack on business

Raymond Keating
Raymond Keating

The Biden tax agenda amounts to a comprehensive attack on business, investment and wealth creation. It is, therefore, also an assault on entrepreneurship and American workers.

President Joe Biden and his administration emphasize the notion that since they’re directly raising taxes on businesses and those earning more than $400,000 a year, that somehow there will be no negatives for the economy. Of course, that’s politics talking, not economics.

If you raise taxes on higher incomes, the results include altered incentives and decisions by such income earners, along with reduced dollars in their hands. That means investments in new and expanding businesses are discouraged and reduced while more resources accumulate in political hands to be redistributed according to political incentives.

No matter how much those on the left and in the White House might wish it were not the case, the reality is that the incentives and knowledge deficiency in government guarantee that dollars drained from the private sector to be spent by government will generate serious inefficiencies. All of this combines to restrain economic, income and employment growth.

The same, naturally, goes for increased taxes on businesses, with Biden proposing to increase the corporate tax rate from 21 percent to 28 percent and the top individual income tax rate from 37 percent to 39.6 percent. The obvious results are reduced incentives and resources for expanding business.

A favorite levy of the class warfare set is the estate, or death, tax. After paying a lifetime of taxes and fees, government shows up at death to grab a chunk of an individual’s assets. In fact, the top federal death tax rate is 40 percent and applies to estates worth more $11.7 million.

While Biden called for increasing the estate tax on the campaign trail, some think his latest tax plan didn’t include an increase in taxes at death. That’s not exactly true. Biden has proposed a dramatic change in the capital gains tax applied at death, which, in turn, would dramatically increase the overall tax rate faced at death.

Consider that Biden would impose both the estate tax and capital gains tax at death. What has long been the normal case, imposing both taxes at death was avoided. So, tax law generally has allowed for a what’s known as a stepped-up basis for assets transferred at death so they weren’t hit by the capital gains tax and death tax. The stepped-up basis means the capital gains basis for an inherited asset is stepped up to the fair market value at the time of the original owner’s death.

But the Biden plan would tax unrealized capital gains at death. For good measure, Biden has proposed a dramatic increase in the capital gains tax — from 20 percent plus the 3.8 percent tax for a total of 23.8 percent to the top ordinary tax rate of 43.4 percent on gains worth more than $1 million.

Let’s consider the example of a small business valued at $52 million at the owner’s death after an initial investment of $12 million. The $40 million capital gain would be taxed at 43.4 percent for a liability of $17.36 million. The remaining $34.64 million in assets, after the $11.7 million exemption, would be taxed at 40 percent, for an additional tax bill of $9.18 million. That’s a total tax bill of $26.54 million, or a total tax rate of 51 percent.

Factor state taxes and inflation into the equation — capital gains aren’t adjusted for inflation — and the real total tax rate would soar even higher.

Of course, there are many small businesses that could be viewed as “asset rich,” yet not have the cash flow to pay such an enormous tax bill. For good measure, this massive government tax grab can come at a particularly vulnerable time at the owner’s death. The death tax already can be a death sentence for small businesses. This Biden proposal would only terminate more enterprises.

Keep Biden’s campaign pledge to increase the estate tax in mind. That creates more tax uncertainty and concern for what might still be coming.

The total tax rate would vary by circumstances, but the government grabbing somewhere around half, or more, of assets at death would be a major hit for small businesses and investors and serve as an obvious disincentive to investing in a business and an incentive to sell a business.

Investing in new and expanding businesses, and, for example, in the stock market — a critical vehicle by which businesses raise capital to innovate and build — are positives for the economy. 

The ills of raising taxes on such investments certainly aren’t limited to upper-income earners. Indeed, the bad news would be widespread, restraining economic, income and job growth.