Conversation with a Facebook Friend on Biden's Economy

Conversation with a Facebook Friend

Topic: Joe Biden's Economy (Part I)

Preface

Every now and again, valuable interactions with real friends take place in public spaces like social media that turn out to be interesting and possibly productive. The following is one such conversation. 

The friend will remain anonymous until and unless that person gives me permission to identify them. (Note deliberate use of gender neutral plural pronoun).

I'll post the conversation in sequential installments since both of us tend to be rather long-winded. 

Below: Part I

May 2021

Me “Anybody making less than $400K a year will not pay a single penny in taxes and we will not increase the deficit either," Joe Biden said yesterday at Tidewater Community College.

Of course, Biden's gaffe was quickly corrected (“they won't pay a single penny MORE in taxes”). Earlier, his press secretary clarified that he meant to say that it was households, not individuals, making less than $400K who wouldn't pay more in taxes (“oops, my bad”).

The devil is in the details.

Those who are relieved that Donald Trump is no longer in the White House may not be paying too much attention to these details, but they should be. For instance, the proposed elimination of step-up basis (famously known as the “death tax”) could be devastating to small business owners and middle-class families who have been saving and investing for the future.

This is not just about "soaking the rich" or making them pay their "fair share." It's about regular people, even the middle class, who might benefit from a gift or inheritance (see Forbes article).

As for “no increase in the deficit” to say nothing of the likelihood of inflation (remember the 70’s?), some economists are sounding the alarm. For example, economist Steve H. Hanke wrote an op-ed in yesterday's Wall Street Journal about the "hidden costs" of Biden's $6 trillion spending plan:

“The hidden costs plus excess burdens amount to roughly $3 per additional tax dollar collected. Therefore, to determine the real cost of the big-government proposals put forward by President Biden in his first 100 days in office, we must multiply their $5.7 trillion sticker price by 3. That yields a true cost of $17.1 trillion, or 80% of last year’s gross domestic product.”

We ought not be lulled to complacency simply because Trump is gone. Democrats especially should be as diligent scrutinizing this president as they were scrutinizing his predecessor.

Friend I think it's a bit of a stretch to say that eliminating the step-up basis is a tax increase on the middle class. In the example given by the Forbes article, this teacher making $60k/yr inherits a $1.8m beach house. The median household net worth is something like $250k, and a net worth of $1.8m is roughly 90th percentile. So this inheritance (plus any wealth she accumulated herself) would catapult her into at least the top 10% - not exactly middle class.

One could argue that the step-up basis is a silly loophole that has no place in a meritocracy. Why do we want to tax work (by way of income tax) at 20-39% but then allow a windfall to flow through society's coffers tax-free? Besides, this teacher's uncle bought his beach house for $300k and it appreciated to $1.8m, so his unrealized gain is $1.5m. Depending on his income, his long-term capital gains tax rate might have been 15%, so he was carrying a $225k ($1.5m x 0.15) unrealized tax liability. Why should that $225k liability be instantly erased because he died and had an heir? The teacher is actually getting a discount to this liability because of the $1m exemption. Seems pretty fair to me.

I'm not saying that Biden's spending or tax plan is necessarily wise. We will probably see some nasty effects like inflation, higher debt, etc. But at least it is trying to grow the economy from the ground up and invest in critical areas. And if you don't like deficits or debt, you should look at what happened to the federal deficit and debt under 4 years of Trump!