Presidential candidate and Sen. Michael Bennet (D-CO) released a plan, which he calls his “Real Deal,” with $6 trillion in various initiatives and programs—including universal pre-K, paid family and medical leave, and a public healthcare option—to be funded by several taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases. These tax increases include new levies, as well as repeals of certain changes made by the 2017 tax reform law.
The proposal would repeal the $500 billion Section 199A pass-through deduction created under the Tax Cuts and Jobs Act (TCJA), a deduction Sen. Bennett refers to as a “loophole.” The corporate tax rate would be increased from its current level of 21 percent to 28 percent along with unspecified rollbacks of the TCJA and changes to international tax provisions. On the individual side, the proposal would reinstate the top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate of 39.6 percent, which currently sits at 37 percent, and adding an even higher new top bracket with a 44 percent rate.
Separate from rolling back many of the changes made by 2017 tax reform, the proposal would change the way capital gains are taxed. Under Sen. Bennet’s so-called “smart wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. ,” capital gains would be taxed on an annual basis at ordinary income tax rates (rather than at preferential rates at the time of sale), a policy more commonly referred to as mark-to-market taxation. Additionally, the plan would end step-up in basisThe step-up in basis provision adjusts the value, or “cost basis,” of an inherited asset (stocks, bonds, real estate, etc.) when it is passed on, after death. This often reduces the capital gains tax owed by the recipient. The cost basis receives a “step-up” to its fair market value, or the price at which the good would be sold or purchased in a fair market. This eliminates the capital gain that occurred between the original purchase of the asset and the heir’s acquisition, reducing the heir’s tax liability. , return to 2009 estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. levels, and raise tax rates for large estates.
In addition to increasing these various taxes as funding sources for his proposal, Sen. Bennet has also proposed changes to several tax credits. He would increase the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , which is currently a $2,000 credit for children under age 17, to $3,600 per year for children under age six and to $3,000 a year for children six and older. He would expand the earned income tax credit (EITC) for workers without children to a maximum of $3,000 from $538. He would also expand the premium tax credit, increase the low income housing tax credit by 50 percent, create a refundable mortgage down payment tax credit for primary residences, enact a $3,000 caregiver tax credit, and reform existing tax incentives that primarily benefit high-income homeowners.
Overall, Sen. Bennet’s “Real Deal” aligns with proposals made by other 2020 Democratic presidential candidates. All the leading candidates have suggested increasing the corporate tax rate and individual income tax rates. Many have proposed returning to the 2009 estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. exemption levels and imposing higher, more progressive estate tax rates. Likewise, many have also proposed increasing capital gains tax rates.
Sen. Bennet’s plan stands out in that he has not specified an income threshold to which his capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. changes would apply, whereas other candidates specify that higher rates would only apply to the wealthy. For example, Sen. Elizabeth Warren (D-MA) has proposed mark-to-market taxation and ordinary income tax rates on capital gains, but only for the top 1 percent of households. It appears that Sen. Bennet’s changes to capital gains taxation would apply to all taxpayers. Another unique feature of his proposal is the repeal of the Section 199A deduction for pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es.
In total, Sen. Bennet proposes walking back important reforms made by the TCJA, like the lower corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate, as well as increasing other types of taxes. His $6 trillion price tag is relatively small compared to the price tag of many of the other candidates’ proposals. Still, the “Real Deal” would increase the tax burden on saving, investing, and working in the United States, and reduce the global competitiveness of the U.S. economy.Share