President Biden’s American Families Plan promises expansive benefits to families such as free universal preschool, two years of free community college, child tax credits, and a paid family leave program amongst many other attractive (but expensive) initiatives.
Unlike the recently passed and controversial $1 trillion infrastructure bill, the new benefits would need to be funded year after year which requires levying new taxes on the American people.
One of the proposed new funding methods will close what President Biden calls the “trust fund loophole” which forces families to pay 40% taxes on inherited unrealized gains rather than realized gains alone. For example, if a father bought a stock originally valued at $100, but it appreciated by $1,000, the son would pay $360 on the $900 appreciation.
Many of the advocates for the “trust fund loophole” closure argue that it ensures that wealthy families pay their fair share. Currently, only estates worth more than $11.7 million are subject to paying unrealized gains on the death tax, which consists of the top 1% of Americans.
But by closing the “trust fund loophole”, what President Biden actually means to say is that he plans to lower the death tax threshold to any estate worth more than $1 million. Because of inflation and cost of homes, most “millionaires” today are actually middle-class, with most of their net worth residing in their home.
Applying the death tax to unrealized gains would not apply to stocks alone – but to homes and businesses as well. The change could potentially devastate middle-class families who have held property or businesses in their families for generations.
For example, California land has appreciated considerably over the last generation. If a piece of farmland has appreciated by $10 million, and if the inheritor cannot come up with the $4 million to pay the IRS, the family would be forced to sell the farm.
Families of small business owners could be subject to the new death tax as well, especially if the owner died unexpectedly. Some would be forced to sell cherished family businesses to pay the 40% estate tax on assets.
As Carol Roth explained in her new book, The War on Small Business, most businesses in America are small businesses. Before the pandemic, there were an estimated 30.2 million small businesses, as opposed to 10,000 – 15,000 big businesses throughout the United States. Small businesses comprise over half the GDP and half the employment of this country. The overall economic value of small businesses greatly exceeds the small tax benefit the government would receive from forcing a business to go defunct.
Furthermore, the median net worth of homes is quickly rising. By 2030, the average California home is expected to cost $1 million. Without accounting for any other asset, many Californians would be subject to the newly lowered estate tax.
Rather than continue a business or keep property in a family name, some would certainly prefer to sell the inherited assets to improve their lives. Many in the middle-class take their modest inheritances and put it towards college funds for children, paying off debts, or starting new businesses. The American Dream is not about simply making money – but about generating wealth to create a better life for your family when you pass on. What happens when that motivation diminishes? Economic output also diminishes, and individuals spend money on frivolous pursuits.
The American Families Plan claims to assist families, with a particular focus on aiding minorities as well. Many disadvantaged minorities have not been able to create generational wealth because of discrimination and now-outlawed practices such as redlining and banking restrictions. Lowering the estate tax is simply a new way to prevent minorities from passing wealth on to new generations.
By punishing the accumulation of wealth, the American Families Plan harms the very people it asserts to assist.
McKenzie Richards is a development associate at the Pacific Research Institute.