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Generating more revenue for infrastructure plan

The administration's proposed infrastructure plan would raise the tax rate and make capital gains subject to income taxes.

Earlier this summer, inspectors discovered a crack in one of the beams supporting the Hernando DeSoto bridge that carries traffic on Interstate 40 from Memphis, Tenn., into Arkansas and from West Memphis, Ark., into Tennessee.

Not only did state transportation officials have to re-route traffic from the Hernando DeSoto Bridge to the Interstate 55 bridge, but the U.S. Coast Guard stopped barge traffic up and down the Mississippi River until inspectors could ensure the I-40 Bridge wouldn’t collapse.

While the incident added 30 minutes to two hours to the time it took motorists to cross the river at Memphis and caused a slight increase in freight rates for barge and truck shipments, experts say the bridge is one of thousands that may need repairs or replacement along with other transportation structures across the country.

Income Tax

The Biden administration’s American Jobs Plan or Build Back Better proposal would provide roughly $2.4 trillion to address those needs, and the U.S. Treasury Department’s Green Book, which was released in May, discusses how the administration would fund the construction.

The proposals would raise the ordinary income tax top rate from 37% back to 39.6% and make capital gains subject to ordinary income taxes. But they wouldn’t stop there, according to Kristine Tidgren, director of the Center for Ag Law & Taxation. She spoke at this year’s virtual Mid-South Agricultural and Environmental Law Conference.

“This is something we talked about – the 39.6% rate – but this capital gain under the proposal would also be subject to an additional 3.8% tax,” said Tidgren, who also teaches agricultural law at Iowa State University,

“Currently, we have this net investment income tax or NIIT that applies to investment income over $250,000 as married couples. But the president’s proposal says ‘wait a minute – not everyone is paying this so-called net investment income tax or Medicare tax.’ So the proposal would expand it to more taxpayers.”

Self-employment

If taxpayers have self-employment income, they must pay self-employment tax of 15.3% on that income. Once they reach $140,000 of income they no longer pay the 0.12% of Social Security tax any longer, but they do pay the 2.9% Medicare tax. Under the Affordable Care Act, they also pay 0.9% additional Medicare tax on income over $200,000 as a single person and $250,000 as a married person.

“That means if I have self-employment income, I pay 3.8% on my income over $250,000,” she said. “If I have investment assets, I pay that 3.8% tax on my investment income over $250,000. What the president’s plan says is there’s a lot of income escaping the additional 3.8% tax.

“For example, if I have a Subchapter S corporation, I don't pay that 3.8% tax on my distributions because I only pay FICA tax on my reasonable compensation, so I escape the 3.8% tax. If I have a self-rental situation where I receive rental income from my active farm business, I wouldn't pay this 3.8% tax. If I sell a business asset like farmland that I’ve been using in my business, it’s called Section 1231 gain, and I don’t pay that 3.8% tax under current law.”

The administration proposal would impose the 3.8% tax on “everything, So, essentially, any income over $400,000, if it’s not already subject to it through NIIT or SECA, it would be under this proposal.

“I just want everybody to understand that, in most cases, the highest tax rate that we’re talking about is not even 39.6% – it’s really 43.4% because you have to add on this 3.8% tax that would essentially be levied on all of this income as well.”

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