Spending Bills Will Kill Competition

While this week may be “infrastructure week,” it’s been the year of renewed interest in antitrust in Washington. Members of both parties have introduced legislation to beef-up antitrust enforcement and even overhaul antitrust law as we know it to address perceived problems of market concentration in various sectors, most prominently big tech. However, two tax policy changes being debated as part of the two “infrastructure week” packages ought to create skepticism of Washington’s concern over market concentration. These are the changes related to cryptocurrency reporting in the $1.2 trillion bipartisan infrastructure bill and the elimination of the step-up in basis rule for inheritances for estate (death) tax purposes as part of the $3.5 trillion budget resolution being pushed by Democrats.

Big tech is taking the brunt of the antitrust ire. Conservatives believe they are being disproportionately “censored” by tech companies. Progressives are more-broadly concerned about concentrated power in Silicon Valley. The cryptocurrency/blockchain industry, while still a nascent technology and industry, has the potential to tackle both of these problems. Already, users and start-up firms around the world are using blockchain technology, powered by various cryptocurrencies, to get around government censorship and private content moderation alike. The decentralized nature underlying blockchain technology and the cryptocurrency market also poses a direct, competitive challenge to not only the tech giants but concentration in the financial sector as well.

Yet, despite the valiant efforts of a bipartisan group of Senators, tax reporting language that would likely push critical elements of the sector offshore just passed the Senate. If these changes become law, the disruptive potential of blockchain-based technologies and firms will inherently be limited, an undeniable blow to competition in areas many officials claim we need it most.

A concerning development for competition across the broader economy is the reported elimination of the step-up in basis rule as part of the Democrats’ $3.5 trillion budget resolution. Per the Tax Foundation:

“The 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.”

Eliminating the step-up in basis rule effectively amounts to a double-death tax, subjecting some inheritances to tax rates north of 60 percent. What many who advocate for such punitive taxation fail to realize is that these taxes aren’t just applied to huge fortunes of liquid assets, à la Scrooge McDuck’s vault. Small businesses, from farms to factories, are subject to the tax as well. Even modest amounts of land and other capital, such as machinery and buildings, can quickly put a family-owned business in the crosshairs of the death tax. These people and their businesses may look wealthy on paper, but they usually do not have the cash on hand to cover taxes at the current estate tax rate, let alone without the step-up in basis rule.

Estate taxes force many small businesses to liquidate to cover the tax. This not only kills jobs, but it immediately reduces consumer choice and harms competition. Small businesses with the competitive potential to scale and compete with dominant firms in any given sector can disappear simply because the owner suffers an untimely death. Politicians in Washington cannot claim to be interested in promoting competition while actively seeking to expand a policy that forces competitors from the market or, better yet, drives them into being acquired by larger firms.

Should the policy changes described above become law, the sincerity of ongoing efforts to overhaul antitrust law ought to be drawn into serious doubt. The federal government cannot serve as an effective arbiter of competition in the marketplace so long as it continues to insert itself as the most significant obstacle.

Patrick Hedger is Vice President of Policy at Taxpayers Protection Alliance