A week ago, Agriculture Secretary Tom Vilsack spoke to reporters about ways to remove the tax disincentive preventing landowners from selling land to farmers.
Vilsack noted at the American Farm Bureau Federation meeting that he and his wife, for instance, would be hit with a high capital-gains tax if they sold their farm in Iowa to someone else. It's more beneficial under the current tax system to hold onto that ground. Then, in his estate, allow his heirs to take over the land and then sell it with the stepped-up basis and avoid tax penalties.
The agriculture secretary said there needs to be a way to help offset those higher capital-gains taxes in such land sales.
Late Saturday evening, the White House issued a fact sheet on a new tax proposal President Barack Obama will roll out Tuesday night at his State of the Union speech. The plan effectively increases taxes on wealthier people while offering some tax breaks for middle-class wage-earners.
The plan centers around a proposal to "close the trust-fund loophole" that allows wealthier Americans to avoid capital-gains taxation through stepped-up basis by letting wealthy people pass on appreciated assets to their heirs tax-free.
The plan would also raise the top capital-gains and dividend rate from 20% to 28% for people earning more than $500,000 a year.
The White House plan is more likely to become a talking point regarding inequality than a tax plan that will gain traction in Congress, considering that anyone would be hard-pressed to find a Republican in Congress interested in raising capital-gains rates. Yet, the plan will create another demarcation line between the president and Congress over any potential tax-reform plan that the GOP may offer in the coming months.
According to the White House, the plan would generate $320 billion in new revenue over 10 years to more than offset $175 billion in middle-income tax-cut proposals.
The proposal targets what the president's tax advisors view as an unfairly low tax on capital income. The fact sheet notes capital-gains rates are lower than tax rates on work "which explains how the highest-income 400 taxpayers in 2012 -- who obtained 68% of their income from capital gains -- paid income tax at an effective rate of 17%, even though the top marginal income tax rate was 35%."
Stepped -basis effectively allows people to hold on to assets until death and are thus never subject to income tax. Gains are computed based on the stepped-up value at the time of the individual's death, "making the capital gain income forever exempt from taxes."
"Each year, hundreds of billions in capital gains avoid tax as a result of stepped-up basis."
The White House argues that the proposal would "almost exclusively impact the top 1%." Those people would still get a preferential rate on their income from investments, but they would no longer be able to accumulate extra wealth by paying no capital gains tax whatsoever."
For businesses, "No tax would be due on inherited small, family-owned and operated businesses - unless and until the business was sold. Any closely-held business would have the option to pay tax on gains over 15 years."
The proposal, however, doesn't necessarily spell out how a landowner would be able to sell land a lower tax rate than now. In fact, it would seem that the capital-gains rate overall would be higher.
Farm groups have largely supported stepped-up basis as a way to transfer the farm within the family without the heirs getting hit with higher capital-gains taxes should they choose to sell the property.
Another piece of the proposal would increase taxes on the nation's largest financial institution. It would charge a fee on "large, highly-leveraged financial institutions to discourage excess borrowing," the White House stated.
In terms of middle-class tax cuts, the proposal would provide a $500 tax credit to any couple that has two wage earners. The White House stated that would benefit 24 million couples.
The plan would "streamline child-care tax incentives" for families, allowing up to $3,000 per child. Currently, the cap is $6,000 for two or more children. Thus, if a couple had three children in day care, they might then be eligible for up to $9,000 under the president's plan.
The president also proposes to consolidate the various education credits into just two, allowing up to $2,500 a year for five years for students.
The president will also propose a retirement tax-reform plan that would make it easier for people to save for retirement.
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