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Winston on Build Back Better

December 2, 2021|

The Biden Administration has attempted to sell its $2 trillion Build Back Better plan, including $540 billion in tax hikes on family businesses, as popular with voters.  That’s simply not true.

An op-ed published yesterday by David Winston in Roll Call makes this clear.  The results of his firm’s latest survey reveal a glaring disconnect between the goals of Build Back Better and the priorities of everyday Americans. As Winston writes:

Political leaders have to address the priorities of the electorate. It’s becoming increasingly clear that Biden is not just off message with Build Back Better, he’s off policy priorities; and it’s showing in his numbers.

Overall, his job rating in our Nov. 22-24 Winning the Issues survey was 42 percent approve to 47 percent disapprove. His disapproval rating was slightly better than some polls, but it was still poor. On the issue of the economy, Biden was down 8 points, 41 percent approve to 49 percent disapprove. But that pales in comparison to his job rating on inflation — at an abysmal 36 percent to 52 percent approve/disapprove. On all three counts, he is not even close to having majority support for his current efforts.

This failure has implications for the coming elections.  As Winston argues, “When presidents decide to ignore voters’ top priorities in favor of delivering their party base’s top priorities, they often pay the price in their first midterm election.”

In a recent survey for the S Corporation Association, The Winston Group asked voters, “Which is the more important priority for the country?”

Twenty-one percent picked passing Biden’s Build Back Better plan. Sixty-eight percent chose “dealing with inflation and scarcity of goods caused by supply chain problems.”

Independents were even more emphatic, favoring the second option 72 percent to 12 percent.

On what will likely be top issues in the midterm election, they are underwater on every key component of people’s No. 1 issue — the economy. Respondents to our survey said Republicans would do a better job than Democrats at handling the economy (46 percent to 39 percent), gas prices (47 percent to 35 percent), inflation (46 percent to 34 percent) and the supply chain (43 percent to 36 percent). 

But amid surging inflation, labor shortages, and a supply chain challenges, the White House attributes President Biden’s slumping approval ratings to “poor communication” rather than misdirected policies. Winston has a different view:

Joe Biden was elected to do three things — win the war against COVID-19, bring the economy back and unify the country. He’s done none of them.

What this administration doesn’t seem to understand is that it is not enough for a policy to be popular, it has to be a priority. It’s not that child care or climate doesn’t matter. But if a working mom has difficulty paying for groceries to feed her child for the week and for gas to get her to day care, climate change policies that drive up energy and food prices simply don’t address her needs.

Outcomes matter. After declaring victory over the coronavirus in July, Biden has had to retreat, first with the delta variant and now with omicron, leaving the country wondering whether he understands how to defeat it. On top of that, the country is more divided than ever, and inflation and energy costs are through the roof and crushing the average family budget.

The political litmus test for successful policies isn’t whether they appeal to the base. The real question Biden and his party need to ask is, “Does what we’re proposing meet the most important needs of the majority of Americans?” If they don’t get the answer right, 2022 could be 2010 all over again.

You can read the entire op-ed here.

BBB Still Harmful to Main Street

November 22, 2021|

Ken Kies is out with an excellent piece today that breaks down how bad of a deal the House-passed Build Back Better Act is for pass-through businesses. As the former Joint Committee on Taxation head explains, even though this latest bill abandons efforts to repeal the 199A deduction, the tax hikes that remain create an “extreme disparate treatment” for pass-throughs compared to C corporations.

Kies focuses on the House bill’s new surtaxes (5 percent on pass-through income over $10 million, and 8 percent over $25 million) and the expansion of the 3.8 percent Net Investment Income Tax. Together, these changes raise the top pass-through rate to 41.4 percent, assuming the 199A deduction is received.  Here’s Kies:

The following illustrates how an increment of $10 million of income of a passthrough business subject to this 41.4 percent compares with a similar $10 million increment of income for a C corporation:

Now let’s consider the tax on current and subsequent distributions of C corporate income as dividends under the tax regime before Congress:

Now let’s compare the total tax burden on the same increment of $10 million of income for a passthrough business and a C corporation:

The comparison is truly astonishing. The same $10 million increment of income of a C corporation will bear a total ultimate tax of $2,677,806 while a passthrough business with the same increment of income will bear a total and immediate tax of $4,140,000, a burden 54.6 percent. 

What could possibly be the policy rationale for such disparate tax treatment? Kies posits that it must be a misunderstanding:

Experience in the tax legislative process teaches that late-breaking ideas frequently have consequences that are not understood and that, also frequently, they may have a limited useful life. Exhibit A in the limited useful life category would be the ill-fated and poorly thought-out wealth tax that had a useful life of about 18 hours over October 24-25. House Speaker Nancy Pelosi, D-Calif., described its proposal as a publicity stunt. Surely, the surtax proposal’s consequences regarding the disparate treatment of passthrough businesses were also not understood. If Congress is going to pursue surtax proposals, the problem of extreme disparate treatment should be addressed.

With Majority Leader Schumer setting a Christmas deadline for passage of the BBB, Senators will have just over a month to decide whether they want a tax system that encourages economic growth and employment, or one that consolidates economic power and decision making into the C-suites of a few thousand public companies, leaving thousands family-owned businesses and the communities they serve worse off.

Americans Oppose BBB: New Survey

November 18, 2021|

The House is back and has its sights set on passing the multi-trillion-dollar tax and spending package known as the Build Back Better (BBB) Act. How do voters feel about a 2,400-page bill that targets Main Street businesses with $500 to $600 billion in higher taxes?  With lawmakers in a panic to advance the legislation, they evidently forgot to ask their constituents – so we did.

A new poll by the Winston Group asked 1,000 registered voters about the President’s agenda and its impact on their personal lives. The results reveal a serious disconnect between the goals of the Build Back Better Act and those of everyday Americans.

House leaders insist the BBB is popular among voters, but our survey tells a different story.  As the Winston Group reports:

In terms of what is the more important priority for the country, voters overwhelmingly (68%) said that dealing with inflation and scarcity of goods caused by supply chain problems was more important than passing the Build Back Better plan (21%). Among independents, this was even more decisive as they said dealing with inflation should be the priority (72%), with only 12% saying it should be passing the Build Back Better plan.

Are moderates in the House and Senate paying attention?  By a three-to-one margin, voters want Congress to deal with inflation and supply-chain issues, not passing the BBB.  And just how do they view the BBB?

Overall, voters are more likely to say the plan will have a negative impact on themselves and their families (44%), compared to 27% saying the impact will be positive and 18% saying there will be no impact. Among independents, nearly one out of two (49%) says this impact will be negative (15% positive; 20% no impact).

So the BBB is not popular despite the Biden administration claims. For those who argue the BBB will help address rising prices, voters have other ideas:

[Voters] believe that the spending and tax increases in President Biden’s Build Back Better plan would increase consumer goods prices for my family (61-23 believe-do not believe).

The tax hikes in the BBB were seen as inflationary, too:

Over half the country (52%) believes a tax increase would increase inflation, rather than decrease (11%) or have no impact (19%). Among independents, 55% believe it will increase inflation (7% decrease, 17% no impact).

Other highlights?  The survey finds general support for raising tax rates on corporations and wealthy individuals, but voters are also worried about tanking the economy:

There is a general belief that corporations and wealthy individuals are not paying their fair share of taxes (64-25 believe-do not believe). Yet there is also the belief that the last thing we need to do right now is raise taxes on businesses and individuals (59-30).

When voters learn how much the wealthy already pay, support for taxing them more evaporates.  They were asked, “According to the IRS, the top 30% of income earners pay 90% of all the federal income taxes. Do you think that is more than their fair share, about right, less than their fair share, or don’t know?” 

Twenty-six percent answered more than their fair share, 33 percent said it was about right, and only 22 percent said it was less than their fair share.  That’s nearly three-to-one (59 verses 22) against the idea that the rich need to pay more.

So taxing the rich is not popular when voters understand how much they already pay.  This disconnect applies to taxes on family businesses as well.  While some voters initially support the rate hikes in the BBB, their support erodes when they understand those tax hikes would apply to family businesses:

President Biden’s Build Back Better plan would impose a new 8% surtax on a taxpayer’s income exceeding $25 million and a 5% surtax on income exceeding $10 million. Do you favor or oppose this proposal? 52-32 favor-oppose.

However, when people are told that the surtax proposal would apply to individually and family-owned businesses making $200,000 or more, voters oppose this proposal 38-45…. Among independents, support for the surtax proposal flips to opposition… 29-49.

The same dynamic applies to provisions that would expand the 3.8 percent NIIT and making the loss limitation rules permanent:

Voters were only marginally open to expanding the 3.8% Net Investment Income Tax to apply to business income exceeding $500,000 for active business owners (42-38 favor-oppose). Independents were opposed (32-45).

On hearing the 3.8% tax would apply to individually or family-owned businesses held in trust when their income exceeds $13,000, not $500,000, support dropped (28-53 favor-oppose). Independents were even more strongly opposed in this case (15-61).

And:

Reflecting the concern over the fragile economic environment for businesses, voters tend to believe that individually and family-owned businesses still recovering from COVID shutdowns should be allowed to fully deduct their losses (48%) rather than limiting losses they can deduct to $500,000 (30%). 

Respondents also soundly rejected Senator Wyden’s proposal to tax unrealized gains (just 24 percent support while 60 percent oppose), which explains why that idea fell out of the plan so quickly. And, by a 2:1 margin, voters overall believe the BBB’s tax increases would subject individually and family-owned businesses to the highest marginal tax rates of all our trading partner countries (50-25 believe-do not believe).

So to sum up, voters think the Biden administration’s Build Back Better plan fails to address the daunting challenges they face today, they believe it will make inflation worse, and they see it as harmful to the family businesses that are the foundation of local economies across the country.  We already knew family businesses oppose the President’s Build Back Better Act because of the massive tax hikes it includes.  We now know voters don’t like it either.

Biden Framework Still Targets Family Businesses

November 16, 2021|

Note: the first table shown below has been modified to correct a previous error. 

A key aspect of the Biden “framework” under consideration in the House is how it targets family businesses with modest incomes through the discriminatory treatment of taxable trusts.

That’s because the rate hikes on trusts in the bill have income thresholds well below the headline levels that would apply to individuals.  These lower levels are an apparent attempt to discourage gaming, but they hit existing trusts that predate the new rules, as well as modestly-sized family businesses that are not the advertised targets of the new policy.

These S corporations and partnerships would start paying higher rates on just $13,000 in income, violating the President’s pledge to not increase taxes on those making less than $400,000.

And they would pay a new top rate of between 41.4 and 48.8 percent on just $500,000 in business income. Starting in 2026, those top rates would be 44.0 and 51.4 percent, respectively.  Combined with state levies, these businesses would face the highest marginal rates in the OECD.

That compares to an average top rate of around 30 percent for public C corporations when you include both the corporate rate and the tax on dividends and capital gains.

Put differently, family businesses organized as pass-throughs face two new rate hikes under the Biden framework, while C corporations face none.  Those tax hikes are:

  • A new surtax on all forms of income, applied against a modified version of Adjusted Gross Income, equaling 5 percent over $10 million and 8 percent over $25 million. For family businesses with taxable trusts, those thresholds are $200,000 and $500,000, respectively.
  • An expanded application of the 3.8 percent Net Investment Income Tax to include the S corporation and partnership income earned by active owners of the business. Currently, active owners of these businesses do not pay the NIIT on their business’ profits.  This expanded tax applies to owners with incomes exceeding $400,000 (single) and $500,000 (joint), but for business shares held in trust, the expanded tax applies to income over just $13,000.

Meanwhile, under current law the top rate applying to pass-through businesses rises from 37 to 39.6 percent starting in 2026, further adding to the rate disparity between pass-throughs and C corporations.

The result is the top pass-through rate will be more than double the statutory C corporation rate.

Finally, while the current framework doesn’t cap or repeal 199A, it does negate its benefits for businesses paying the surtax. That’s because the surtax applies to AGI, not taxable income, so the 199A deduction has no effect on the tax base of the surtax.  It’s as if Congress repealed 199A for purposes of the surtax and an important feature of the surtax that supporters of the 199A deduction need to understand.

At this point, you’re probably asking, “If the rate disparity is so large, why don’t these family businesses just convert?”  The answer is simple – it wouldn’t help.

The key feature of modern corporate finance is that three out of four public C corporation shareholders don’t pay taxes or pay significantly reduced amounts of tax.  Moreover, because the second layer of tax on C corporations is in many cases discretionary – it is only incurred when the stock is sold or dividends are paid — even those shareholders who do pay taxes end up paying less than the statutory rate.

The result is that public C corporations are largely immune to the double tax.  So Warren Buffett pays a 21 percent effective marginal rate on his Berkshire-Hathaway shares because BK doesn’t pay dividends and Buffett doesn’t sell any of his shares.

Shareholders of a private C corporation, on the other hand, don’t have that option.  There’s no market for minority stakes in private companies, so the only way to reward shareholders is to either 1) pay dividends and shoulder the full double tax, or 2) reinvest the earnings, grow the business, and then sell the entire business at some point in the future.  Either way, private C corporations get hit with the double tax and are at a disadvantage compared to their publicly-traded competitors. That’s why Congress created the S corporation in the first place.

The Biden framework is an anti-Main Street bill that would knee-cap family businesses just when they are emerging from the pandemic and resulting shut-downs.  It will raise rates on family businesses to the highest levels in the OECD and hurt the very communities it is supposed to help.  The Senate needs to take a long look at this bill before they rush to pass it.

 

 

Talking Taxes in a Truck Episode 17: “Follow the Money”

November 10, 2021|

Our latest podcast guest is Lynn Mucenski-Keck, a Partner at New York-based tax and consulting firm The Bonadio Group and author of an excellent piece in Forbes that recently caught our attention. Lynn walks us through the various tax hikes included in the latest House tax bill, and highlights the threat they pose to the pass-through business community. She also sheds some light on how she’s helping clients navigate this uncertain future, and even reveals her favorite winter cooking recipes.

This episode of Talking Taxes in a Truck was recorded on November 9th and runs 29 minutes long.

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