It was Ben Franklin who said that they are the only two certainties in life . . . death and taxes.
But for wealthy Americans eyeing President-Elect Joe Biden’s tax proposals, a higher tax bill truly is a near certainty. Biden plans to increase taxes on the wealthiest and highest earning Americans regardless of which side of the political divide they are on. And while we all pretty much understand that our country has a massive deficit that we need to bring under control, there is no shortage of opinions on what the best steps to accomplish this without causing too much pain. As we bring a very challenging 2020 to an end, I’d like to dive into the proposed tax plan from the incoming administration, and specifically the elements that will affect the affluent.
For the wealthiest Americans still earning active and investment income, there are two key proposals. Biden is proposing an increase of 2.6% in the marginal payroll tax rate for those earning above $400,000 per year. In addition, those making above $400,000 will have to pay FICA or Social Security taxes on wages above that amount. Currently, FICA or Social Security taxes are only paid on wages up to $137,700. Biden would keep the cap at $137,700, but those earning above $400,000 would have to pay the FICA tax on anything above that amount as well. More importantly, he also wants to increase taxes on capital gains and qualified dividends for those with incomes above $1,000,000 per year.
And death won’t bring any relief for the affluent with Biden seeking to lower the estate tax exclusion from the current $11.58 to $3.5 million. He is also seeking to raise the highest estate tax rate from 40% to 45%. This will require most of the wealthiest Americans to make significant adjustments to their estate plans. Another key piece of Biden’s plan affects those who will inherit wealth by eliminating the step-up in basis on assets passed onto them at death. Folks, this piece of the plan could potentially hit all classes of Americans.
Biden and the Democrats argue the changes are needed to address economic inequalities and the mushrooming national debt. While no one is going to come out against improving the prospects for middle class Americans or addressing the national debt crisis, there is great concern as to whether Biden’s “tax the rich” proposals will do more harm than good. Increasing taxes on the wealthy may increase revenue in the short term, but there is great fear amongst many that the long-term effects may create drag on the economy.
You see, on the surface increasing taxes on the rich seems like a simple solution to increasing revenue and promoting a more equitable economy, but history shows us that it could also dampen enthusiasm for investment and hinder job growth. Conservative think tanks like The Tax Foundation and American Enterprise Institute predict the Biden plan would shrink the US economy in the coming decades.
Anything Biden hopes to enact will have to be accomplished into the strong headwinds of the pandemic and partisan politics. More than likely, he will take the oath of office as the pandemic reaches its peak and as the US is trying to emerge from the ongoing economic crisis it has brought. Any type of tax increase runs the risk of cooling economic growth when we need it most.
On the political front, Democrats may be celebrating a return to the White House, but they lost significant ground in the US House and are already turning a nervous eye toward the 2022 mid-term elections. The Senate remains up for grabs with both sides awaiting the outcome of run-off elections for the two Georgia Senate seats. The Republicans are still in a decent position to maintain control of the Senate and temper Biden’s ability to fully deploy his plan. Republicans themselves, while typically opposed to tax increases, are not immune to public calls to give the middle-class better footing and address the ongoing national debt crisis. How all these issues play out will impact how much of Biden’s plan eventually becomes law.
Beyond tax increases for individuals, Biden’s plan also calls for an increase to the corporate tax rate. Biden is seeking to raise the current corporate tax rate from 21% to 28%. He is also looking to eliminate tax loopholes that allowed major corporations to “offshore” profits and in some cases pay nothing in federal taxes.
There is little doubt that Biden and the Democrats will make a strong push to increase taxes on the wealthy and corporations. Whether it is a wise move in face of the current pandemic economic crisis, a struggling middle-class, and the growing national debt remains to be seen. Regardless of how you feel about the wealthiest Americans, it’s looking like they will be a key component of any recovery we experience. As John F. Kennedy once said, “The only unchangeable certainty is that nothing is unchangeable or certain.”
Hmmm . . . let’s just hope that’s the case here!
And as always – be vigilant and stay alert, because you deserve more.
All of us at Cutter Financial Group wish you and your family a very Happy New Year!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield. Jeff can be reached at firstname.lastname@example.org.
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