May 13, 2021
Ways & Means subpanel holds tax fairness hearing
During the May 12 House Ways and Means Select Revenue Measures Subcommittee hearing, “Funding Our Nation’s Priorities: Reforming the Tax Code’s Advantageous Treatment of the Wealthy,” Democratic members largely criticized the benefits to high-income individuals of the lower capital gains tax rate and stepped-up basis, while Republicans warned that increasing capital gains rates and corporate taxes will harm businesses, investment, and US competitiveness. Republicans also warned that expanded unemployment benefits are keeping workers from returning.
In an opening statement, Chairman Mike Thompson (D-CA) said, “A tax system that favors financial assets and dynasty trusts over working families won’t support the investment we need to build a more prosperous future. Tax advantages that favor the wealthy lead to wasteful tax avoidance, which is neither productive nor fair.” Thompson expressed concern about protecting family farms and family-owned businesses in the context of the tax increase proposals, and other House Democrats who represent farm districts have urged the exemption of family-owned farms from any potential changes to the stepped-up basis for capital gains, which the White House has said would be included.
Ranking Member Adrian Smith (R-NE) said the Biden tax increases have been proposed to pay for other priorities and to require high-income individuals and corporations to pay their “fair share,” but the TCJA has been very successful, including in stopping inversions of US companies. “There have been zero corporate inversions since we enacted TCJA. Zero. So why are we here?” he asked.
- Adam Looney, University of Utah
- Jason Oh, University of California Los Angeles School of Law
- Harry L. “Hank” Gutman, Chief of Staff (Retired), Joint Committee on Taxation
- Chye-Ching Huang, New York University Tax Law Center
- Chris Edwards, Cato Institute
Testimony in brief:
- Looney said stepped-up basis allows transfers of wealth across generations of families, and it is one of the largest tax expenditures.
- Oh said a capital gains rate increase to 39.6% and ending stepped up basis would work better in tandem, along with shifting to mark-to-market for more assets.
- Gutman also addressed stepped-up basis, saying it should be repealed because it creates horizonal and vertical inequity, creates an artificial impediment to sales that would otherwise occur, and that the estate tax is not effective as a backstop in capturing untaxed, unrealized appreciation.
- Huang said tax provisions that disproportionately benefit high-income individuals result in avoidance and evasion, including because many of the income sources for the wealthy are not associated with information reporting.
- Edwards opposed the proposed tax increases, saying Biden’s plan would invest hundreds of billions in research but the proposed increase in the top capital gains tax rate would likely dry up financing for innovative businesses: “Capital gains are the reward for risky investments in startups that usually take years to pay off, so when capital gains tax rates rise, investors move their funds to safer investments such as tax-free municipal bonds.”
Below is a paraphrasing of select member questions and witness responses.
Thompson: What is the difference between income inequality and wealth inequality, and has the system narrowed wealth inequality?
Looney: Low- and middle-income households have benefited from the Child Tax Credit expansion, but in terms of wealth, taxpayers that earn wealth from businesses, their tax rates have gone down due to reductions in capital gains and estate tax rates, and those who have fortunes composed of unrealized capital gains have had their wealth expanded on an after-tax basis.
Thompson: Protecting family farms and family-owned businesses is something that concerns me. How can we guarantee that can happen?
Gutman: Closely held businesses shouldn’t have to be sold to pay a tax. Businesses should have tax deferred until they are sold, either by valuing the property using estate tax rules – special use valuation – and deferring payment until the asset is sold, or to have a carryover basis.
Smith: Edwards highlighted the negative impact of capital gains tax increases on investors putting resources into areas like research and business capital, and the Administration’s proposed rate increase on its own would be a net revenue loser. To address that problem, they included items like repealing stepped up basis and 1031 exchanges. Some Democrats are now asking for step-up carveouts for farms and other industries, which would further erode the revenue potential.
Edwards: Economists think the revenue-maximizing rate would be 28% or less, so the President’s proposal doesn’t make much sense for the government or the economy.
Lloyd Doggett (D-TX): Billionaires added to their wealth during the pandemic. Our country is becoming more and more unequal. Requiring high-income taxpayers to pay their fair share can provide resources for more and better opportunities to families. What can we do to address corporate tax loopholes?
Huang: The top 1% get more than 1/3 the value of corporate tax cuts, for shareholders and workers (i.e., CEOs and executives). Proposals to reduce profit shifting and incentives to offshore and raise the corporate way would be sound ways to provide revenue invest in children and infrastructure.
Doggett: Loopholes in partnership law are a problem. What can we do about it?
Looney: Partnerships are intended to be flexible in their financial structures and that can be used to facilitate tax avoidance. They can allow taxpayers to shift income into forms of income that achieve lower tax rates or to defer that income.
Tom Rice (R-SC): The top 1% pay 38.5% of total income tax, the top 10% pay 70% of income tax, the top 50% pay 97%, and many taxpayers pay no income tax. This should be considered when throwing around terms like “fair share.” “Loopholes” exist because Congress wanted to incentivize certain behavior. Why would you have a preferential rate for capital gains?
Edwards: Encouraging investment would absolutely be a reason (for a preferential rate for capital gains), and would result in more productivity from workers, more jobs, and making the US more competitive. I fear increasing the capital gains rate would damage our high-tech industries.
Linda Sanchez (D-CA): The TCJA created a new way for wealthy Americans to hide wealth in the pass-through structure through the 199A deduction. We should ask ourselves why we tax assets more favorably than a paycheck. We should confront how that keeps us from investing in areas that benefit working families.
Oh: President Biden is correctly focusing on how expensive it can be to work if you have a family: childcare, health care. It’s very hard for certain people, especially women and minorities, to re-enter the workforce. We need to focus on expanding opportunity for everyone.
Darin LaHood (R-IL): Higher business tax rates, capital gains rates, and ending stepped-up basis will harm small and family-owned businesses, including farms. How does a family farm pass along the farm if they are forced to sell assets to pay the tax bill?
Edwards: People should want wealthy people to keep their money invested in businesses and generating jobs for all of us. Higher capital gains rates are really problematic.
Suzan DelBene (D-WA): Since 2010, IRS appropriations have been cut more than 20%, also reducing audit rates. How do audit rates of low-income taxpayers compare to high-income taxpayers?
Tax gap money could offset investments in families. How would a permanent expanded CTC and other tax credits increase prosperity?
Huang: Audit rates of high-income taxpayers have dropped because IRS has lost the skilled personnel to conduct them, while EITC-based audits have not dropped as much because mail audits are cheaper to conduct.
It would reduce child poverty and result in healthier children who do better academically.
Brendan Boyle (D-PA): Most people think it’s unfair for tax rates to be higher for wage income than for capital gains.
Oh: JCT’s highest-income category is $1 million and higher; we don’t have data on the ultra-wealthy.
Drew Ferguson (R-GA): We have heard a lot about income inequality and people paying their fair share. Businesses are being crushed because they can’t get people to come back to work, including because UI benefits can pay them more to stay home. And now you are going to subject businesses to a higher tax rate?
Ron Estes (R-KS): We are seeing fewer European countries with wealth taxes. Why did they abandon this method?
Edwards: There used to be more than a dozen countries in Europe that imposed wealth taxes. They found the administrative burdens were too high and the taxes were anti-investment.
Statements and testimony are available here.
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