Personal Income

Democrats’ tax plan is full of old tricks, including protection for the ultra-wealthy


Democrats wanting to raise taxes is nothing new, but who will not pay more under their proposal is revealing.

First things first, the tax plan that House Ways and Means Chairman Richard Neal released Monday would not raise taxes on the vast majority of Americans. If you make less than $400,000 a year and do not have millions invested in the markets, your taxes will not go up.

If you are among the highest 10 percent of American earners, your taxes could rise. But then, Democrats are also planning to keep some of the most unfair loopholes in the tax code.

Stipulate, if we may, that fiscal irresponsibility and subservience to big-money donors are bipartisan vices. Republicans manifest them in lowering taxes without reducing spending. Democrats demonstrate them by raising taxes alongside spending without addressing the growing budget deficit.

Both habits lead to a growing national debt that taxes future generations. Members of both parties only discover fiscal discipline when they are out of power.

Democrats fell back on their tried-and-true tax tricks this week. They proposed creating corporate tax brackets, like the personal income tax, with the top rate rising from 21 percent to 26.5 percent.

Their tax plan would increase the top rate on stock and bond sales—the capital gains tax—to 28.8 percent from 23.8 percent. The top personal income tax bracket would rise from 37 percent to 39.6 percent.

If you make more than $5 million a year, the Internal Revenue Service would levy an additional 3 percent surcharge.

Taxing the rich is standard operating procedure for moderate Democrats. The progressive wing of the party, meanwhile, considers the package wholly inadequate.

The top 20 percent of Americans take home 48 percent of the nation’s income, according to the nonpartisan Pew Research group. The lowest-paid 30 percent of workers account for only 9 percent of national earnings. The rich are getting richer; the middle class is shrinking.

Upper-income families have 7.4 times more wealth than middle-class families and 75 times more than lower-income families, Pew calculates. These numbers lead progressives to conclude a lot more wealth redistribution is needed to bring economic justice to the country.

Conservatives, meanwhile, predictably denounce Democrats for soaking the rich and starting a class war. U.S. Rep. Kevin Brady, a Republican from The Woodlands, is doing his best to scuttle the plan.

Brady, by the way, engineered the 2017 tax cuts, which will add more than $10 trillion to the U.S. debt by 2027 if left in place. His call for fiscal restraint is pure partisanship since he’s made no sincere effort to balance a budget or pay down the nation’s mind-boggling debt.

Democrats could easily defend their revenue-raising effort if they planned to spend the $2.5 trillion in new taxes to lower the deficit. But instead, they are trying to finance Biden’s $3.5 trillion spending proposal with what can only be described as D.C. Math.

None of this is new, and neither is the force field that moderate Democrats have thrown up around some of the worst sections of the tax code, just as Republicans have done in the past. Rich people finance elections to escape taxation, and both parties deliver.

One of the most blatant forms of legal tax evasion is the carried interest loophole. Private equity firms make their employees partners in their investment funds and then pay the employees with profits from the funds, rather than through salaries or bonuses.

The IRS taxes carried interest at the capital gains rate rather than the much higher personal income tax rate.

Multi-millionaires and billionaires have also figured out they can take massive low-interest loans using their stock and bond portfolios as collateral to avoid paying capital gains. One finance professor calls it the “buy, borrow, die” strategy.

Say you bought $1 million in Facebook stock at $28 a share in 2016, and the price is now $150. If you sell, you must pay capital gains taxes. But if you take a long-term, low-interest loan using the stock as collateral, you can spend the money without selling the stock. If the interest rate is less than the appreciation of the stock, the borrower comes out ahead.

The stockholder/borrower tries to keep the loan going until he or she dies. Because under the tax code, the heirs do not have to pay taxes on the deceased’s capital gains and can sell the stock to pay the debt.

Those are just two examples of loopholes that Democrats are leaving open because their donors rely on them.

Democratic may claim their tax hikes are leveling the playing field, but a closer look proves otherwise.

Tomlinson writes commentary about business, economics and politics.


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