I recently caught an episode of Agritalk that included a farmer forum discussing the STEP Act.
Link: https://omny.fm/shows/agritalk/agritalk-march-31-2021
Senator Chris Van Wollen uses colorful language to describe the rationale for the STEP act: "This is one of the largest tax breaks in the entire federal tax code, with the Joint Committee on Taxation estimating that it is worth $41.9 billion in 2021 alone. Every dollar of the tax break from tax-free stepped-up basis is a government subsidy for inherited wealth, and the bulk of that subsidy goes to the wealthiest family dynasties."
So how might this play out? How are these wealthy dynasties taking advantage of this sneaky loophole?
Paul Nieffer gives one among many egregious scenarios that could play out if certain parts of this act pass:
"Bill and Mary have four children and they usually gift $15,000 of grain to each child annually to help fund their college expenses. Bill and Mary each gave $60,000 of grain in 2021. This reduces their lifetime transfer exemption to $40,000. If they give the same amounts in 2022, they will each have $20,000 of ordinary income to report and it may be subject to self-employment taxes."
Interesting this behavior gets characterized as a 'loophole' and simply raising a crop and earning a living counts as a 'tax break', while sending your kids to college is the thing of 'dynasties.' But the real impacts on flesh and blood human beings are abstracted behind the political rhetoric of the legislation's proponents. As the discussion went during the episode, there are lots of incentive effects to consider. Why invest and improve operations when so much is going to be taken back? What will they have to pass on to the next generation? And this is key. It's not just family farms that are going to be largely impacted, these effects will impact small businesses too. But this is just scratching the surface. Family farms do more than just produce food and small businesses do more than just produce goods or provide services. In addition to being part of the social fabric in towns and communities, and in addition to providing a source of employment they serve other important social functions.
Thomas Jefferson wrote to George Washington in 1787:
“Agriculture … is our wisest pursuit, because it will in the end contribute most to real wealth, good morals and happiness.”
These operations also serve as important institutions that not only transfer real property and assets to the next generation, but also the work ethics and values that go with it. Growing up I raised cattle with my grandfather, but also worked on the larger farms owned by my neighbors. I also worked for a family of WWII veterans who owned a hardware store, farm implement dealership, and a propane gas company. As the author Ayn Rand writes in Atlas Shrugged, 'All work is an act of philosophy.' What I learned from these people (the value of hard work, morals, character, resilience, civic duty, the list goes on....) is more valuable than any lesson learned in college or graduate school. We have gotten so distracted with credentialization we've forgotten that education is about more than a piece of parchment we can hang on the wall. While I won't inherit a dime in terms of what these land owners and proprietors pass on to their heirs, I'll still pass on the values and philosophical underpinnings I learned from them to another generation.
While there are many ways that these successful farmers and businessmen give back to their community in visible ways, there are many important contributions they make to society that go unseen. I'm certainly not the only example of someone that has benefited in this way.
As we continue to spend trillions at the federal level, we definitely should be asking how are we going to pay for all of this spending. Note even the loophole above is estimated to be only in the billions (keep in mind it takes 1000 billion to make a trillion). Let's also not forget that there is a huge difference between tax rates and the revenues that are actually realized. Human beings aren't cogs in a wheel or pieces on a chess board that can be played at the will of planners and bureaucrats. But it is also important to ask what are we paying for and trying to accomplish? What are we giving up to get it? As economist Thomas Sowell writes in 'The Quest for Cosmic Justice"
"many of those pursuing a vision of cosmic justice simply take an adversarial position against the traditions, morals, and institutions that make the survival of this civilization possible."
Along the lines of what Jefferson said, the family farm is one of those important institutions that propagate morals and traditions key to the survival of our civilization from one generation to the next. Will the STEP act put its survival at risk?
