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Joe Biden Inadvertently Schools Conservatives and Libertarians on Tax Deductions

Summary:
Like the other Democratic presidential candidates, former senator and vice-president Joe Biden has a tax plan—a plan to raise taxes. To raise an additional .4 trillion government revenue over the next decade to address climate change, infrastructure, health care, and higher education, Biden has put forth ten specific proposals. Eliminate stepped-up basis. Appreciated assets transferred by a decedent can no longer be “stepped up” to fair market value at the time of death. Raise the top rate on ordinary income. Increase the top income tax rate from 37 percent to 39.6 percent. Tax capital gains and dividends at ordinary rates. Increase the top capital gains and dividends tax rate from 23.8 percent to 39.6 percent. Limit itemized

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Like the other Democratic presidential candidates, former senator and vice-president Joe Biden has a tax plan—a plan to raise taxes.

To raise an additional $3.4 trillion government revenue over the next decade to address climate change, infrastructure, health care, and higher education, Biden has put forth ten specific proposals.

Eliminate stepped-up basis. Appreciated assets transferred by a decedent can no longer be “stepped up” to fair market value at the time of death.

Raise the top rate on ordinary income. Increase the top income tax rate from 37 percent to 39.6 percent.

Tax capital gains and dividends at ordinary rates. Increase the top capital gains and dividends tax rate from 23.8 percent to 39.6 percent.

Limit itemized deductions. The reduction in tax liability per dollar of deductions cannot exceed 28 percent.

Raise the corporate tax rate. Increase the corporate income tax rate from 21 percent to 28 percent.

Impose a minimum tax on corporate book income. C corporations with more than $100 million in book income would be required to pay the greater of normal corporate tax liability and 15 percent of book income.

Raise the tax rate on foreign profits. Decrease the global intangible low-taxed income (GILTI) deduction thereby increasing the effective tax rate on corporate income earned by foreign affiliates from 10.5 to 21 percent.

Eliminate fossil fuel subsidies. Eliminate certain tax credits for oil, gas, and coal production, including expensing of exploration costs and percentage depletion cost recovery rules.

Eliminate real estate loopholes. Eliminate the ability of owners of appreciated real estate assets used in a trade or business to defer capital gains taxes when exchanging the asset for property of “like kind.”

Impose sanctions on tax havens. Impose sanctions on countries that facilitate corporate tax avoidance.

Additionally, concerning tariffs, which are merely taxes under another name, Biden has said that some of Trump’s tariffs should come off, but others should go on. Biden has also said that he supports a financial transactions tax. And regarding the 12.4 percent Social Security payroll tax, which is currently levied on the first $137,700 of employee wages, Biden would also apply it to wages above $400,000.

The Penn Wharton Budget Model (PWBM) projects that Biden’s tax plan would raise between $2.3 trillion (including macroeconomic effects) and $2.6 trillion (not including macroeconomic effects) over the next ten years—not the $3.4 trillion that the Biden presidential campaign estimates. I suppose this can be considered a good thing.

About the only real good thing about Biden’s tax plan is that he is not proposing a wealth tax like Senators Bernie Sanders and Elizabeth Warren.

What I want to focus on is Biden’s attempt to limit how much taxpayers can use deductions to reduce their tax liability. As pointed out above, he is calling for capping the value of tax deductions for the wealthy at 28 percent. Biden’s campaign claims that this would raise $310 billion over the next ten years.

Joe Biden understands a principle that some conservatives and libertarians have yet to grasp: decreasing tax deductions increases taxes.

Tax deductions reduce one’s income subject to tax. One will pay less in taxes the greater the number, and the greater the amount, of deductions that he qualifies for. Eliminating or reducing the value of tax deductions has the same effect as raising tax rates: less money in the pockets of Americans and more money in the pockets of greedy, profligate Uncle Sam. Any support for eliminating or reducing tax deductions should be seen as a call to raise taxes—even if the supporters are conservatives and libertarians whining about how much “complexity” deductions add to the tax code, how much deductions “distort” the tax code, how much deductions “subsidize” high-income taxpayers, and how much deductions encourage people to make “economically unwise decisions.” All tax deductions are good; it doesn’t matter whom they benefit or why Congress enacts them.

Tax deductions—and their cousins tax exemptions, tax breaks, tax loopholes, tax shelters, tax incentives, and tax credits (as long as they are not refundable)—are not subsidies that have to be paid for. Since there is no chance that the income tax will be eliminated or the tax rates substantially reduced, the importance of tax deductions cannot be overstated. As long as Americans have an income tax, the more deductions they can take to lower their tax liability the better.

Laurence M. Vance
Laurence M. Vance is an author, a publisher, a lecturer, a freelance writer, the editor of the Classic Reprints series, and the director of the Francis Wayland Institute. He holds degrees in history, theology, accounting, and economics. The author of twenty-four books, he has contributed over 700 articles and book reviews to both secular and religious periodicals.

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