President Biden is working with Congress to secure investments for programs like paid time off and an expanded child tax credit. One of the ways he has proposed to fund these programs is to change the way capital gains are taxed. These reforms are not just about fundraising, they are about fundamentally reforming the tax system to ensure that the rich pay their fair share.
President Biden has proposed changing the way property is taxed when it is passed on to heirs. Right now, when you sell real estate, you pay tax on the amount that has increased in value since you bought it. If you pass it on to an heir, that heir is treated as if he had purchased this property on the day of your death. Therefore, if he sells, he pays tax only on the increase in value during the period he owns the property.
It doesn’t sound so bad, but this policy has allowed the rich to amass big fortunes. Millionaires and billionaires borrow against their assets, usually stocks or real estate, but also works of art and collectibles, actually anything a bank will lend against. When these assets are transferred on death, their heirs can sell the property without being taxed to pay off the debt. It is one of the most popular ways for the wealthy to avoid tax, and it must stop.
People ask me, what about farmers? Will that not mean that they will have to sell the farm to pay the tax? No, because President Biden’s proposal includes special protections for family businesses, including family farms. The proposal provides two key protections for farmers. First, if a farmer passes the farm on to his children so that they can continue to operate the farm, no tax is due until they decide to stop the operation or sell the farm. This is also true for all other family businesses.
Second, the proposal exempts up to $ 2.5 million in earnings from tax. So even if a farmer’s heirs decide to sell the farm, they only pay tax on any gain that exceeds this exemption. The $ 2.5 million exemption means that more than 95% of families will not face any new tax.
When I was a practicing lawyer, I represented a client who owned a few thousand acres of land. Rather than paying me cash for my work, he paid me with 600 acres of his land. In the early 90s, my land was worth $ 191,000. I then paid taxes on that income, as I did on all other income in my practice that year. I am not a farmer, I am a lawyer and a civil servant, but my wife and I have decided to keep this land. It is now worth almost $ 2 million.
When I die and leave this land to my children, no one will pay tax on the appreciation of its value unless we change the base mark-up policy. My children could sell this land the day after my death tax free. It is not fair.
Maintaining the increase in the base does not protect farmers, but protects investors. The people who are going to pay taxes under the proposal have never plowed an acre. Don’t let lobbyists use American farmers as a smokescreen to maintain a system that allows the rich to pass on their wealth tax-free.
Mr. Vilsack is the US Secretary of Agriculture.
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Published in the print edition of September 9, 2021.