Want to know where the 2020 presidential election is heading? Don’t obsess about the polls. Pay attention to the tax lawyers and accountants who cater to America’s most wealthy.
These experts in saving the rich millions and billions at tax time understand what Americans as a whole still haven’t quite fathomed: The nation’s wealthiest will likely pay significantly more in taxes if Joe Biden becomes president. If these rich don’t take immediate steps to “protect their fortunes,” their law firms are advising, they could lose out big-time to Uncle Sam.
The rich people-friendly tax law that Donald Trump signed in 2017, “wealth preservation” professionals are warning, may soon be shredded.
“We’ve been telling people: ‘Use it or lose it,’” Jere Doyle, a strategist at BNY Mellon Wealth Management, told Bloomberg earlier this month.
“Come in now,” Withers law partner Edward Renn says his firm is telling its deep-pocket clients.
“High net worth individuals,” add legal experts at JD Supra, “should be working with their investment and tax advisors to lock in on tax savings prior to year-end.”
Those who owe their comfy livelihoods to keeping rich people rich have good reason for wanting to panic their clients. But that panic push, at first glance, does seem somewhat overblown. Under the tax plan Joe Biden is advancing, the tax rate on income in America’s top tax bracket would rise only from the current Trump-era 37 percent back up to 39.6 percent, the Obama-era rate, hardly a backbreaker of an increase.
The “backbreakers” — for the rich — come elsewhere in the Biden plan. Among the biggest: a new tax treatment for “investment income,” the money rich people make buying and selling assets and collecting dividends. Most all of this income currently enjoys a super-discounted tax rate.
What sort of difference does this discount make? Consider a star baseball player who makes $2 million a year. That ballplayer, under current law, faces a 37 percent tax rate on top-bracket income, anything over $622,050 for a couple filing jointly.
Now consider your typical Wall Street wheeler-dealers. These speculators face a mere 20 percent levy on the jackpots all their wheeling and dealing ends up generating.
The Biden tax plan ends this favorable treatment of income from “capital gains.” All investment gains for taxpayers making over $1 million would face the same tax rate as the “ordinary” wage and salary income average working people struggle and sweat to make.
Under current law, wealthy taxpayers can also avoid taxes on their capital gains simply by passing on their appreciated assets to their heirs. These heirs don’t have to pay any taxes on the gains in value these assets may have registered before their sugar-daddy hit the bucket.
So say a billionaire buys an asset for $10 million and watches over the years as that asset grows in value to $100 million. If that billionaire sold that asset, the sale would generate a tax on the $90-million profit. But the billionaire can avoid that tax by bequeathing the asset to an heir.
That heir owes no tax on the $90-million gain. If the heir should sell this inherited asset for $105 million one year later, the heir would only owe tax — under existing law — on the $5 million gain in the asset’s value over the previous year. The gain from $10 to $100 million would remain totally untaxed. Biden’s tax plan would subject that entire gain to tax.
Biden is also proposing an overhaul of how the federal government levies taxes for Social Security.
The current 12.4 percent Social Security payroll tax — half paid by employers, half by employees — applies this year to only the first $137,700 in paycheck earnings, a figure that gets annually adjusted to inflation. In 2020, a corporate executive who makes $1 million a year will pay the same Social Security tax as a person who makes $137,700.
Biden’s plan would apply the Social Security tax to all paycheck income over $400,000 as well.
The corporations America’s rich run would also pay more in taxes under the Biden plan. His proposals raise the standard corporate income tax rate from 21 to 28 percent, set a 15 percent minimum tax on corporate profits, and double the current minimum tax foreign subsidiaries of U.S. companies have to pay from 10.5 to 21 percent.
Specific industries, under the Biden plan, would lose an assortment of additional tax-time perks. Big Pharma companies would no longer get tax deductions for what they spend on advertising. Real estate moguls would no longer be able to depreciate the rental housing they own on an accelerated schedule, and fossil-fuel companies would lose a variety of lucrative tax preferences.
The Biden plan features a wide array of other progressive provisions that would help shift the overall tax burden from average Americans to the awesomely affluent. The overall impact of the Biden plan on economic inequality? The Institute on Taxation and Economic Policy has crunched the numbers.
In 2022, under Biden’s plan, the nation’s top 1 percent would bear 97 percent of the direct tax increases Biden is proposing. The next most affluent 4 percent would bear the remaining 3 percent. No household making under $400,000 income would see its direct taxes rise.
That top 1 percent — tax filers making over $675,800 — would see their tax bills jump by an average 8.4 percent, a $174,360 increase. The nation’s top 0.1 percent, adds the Tax Foundation, “would see their after-tax incomes reduced by around 13.0 percent.”
The vast majority of Americans, meanwhile, would see no direct tax increase at all.
That outcome would certainly come as a surprise to Americans who’ve swallowed the claim from Republican National Committee chair Ronna McDaniel that Biden’s election would increase taxes on “82 percent of Americans.” How can Trump fans make that claim? They’re charging that average Americans would indirectly bear the cost of the higher taxes Biden wants U.S. corporations to pay.
Corporations, the argument goes, would react to higher taxes by cutting worker wages or reducing dividend payouts. This indirect impact, statisticians at Penn Wharton calculate, could drop the average incomes of America’s poorest 20 percent by an average $15 a year and cost the nation’s middle 20 percent of income-earners $180 a year.
But if you’re going to factor in these indirect impacts, counters economist Austan Goolsbee, a former Council of Economic Advisers chair under Barack Obama, you also need to factor in the new tax credits that Biden is proposing for low- and middle-income households, everything from an increase in the federal child tax credit from $2,000 to $3,000 per child — with an additional $600 credit for each child under age 6 — to tax breaks for people trying to save for retirement.
Sums up Eric Toder, the co-director of the Tax Policy Center: “Suggestions that the Biden plan amounts to a massive increase in taxes on the middle class are a total misrepresentation of our findings and the findings of other think tanks.”
What the Biden tax plan, if enacted, most certainly would do: cancel the massive tax cut the rich have been enjoying since the 2017 Trump tax act. This perverse legislation, notes tax journalist David Cay Johnston, gave an average $17,800 tax break to Americans reporting between $500,000 and $1 million in 2018 income. The average tax savings for Americans making between $50,000 and $100,000: $143.
The wealthy have still one more major tax reason to see Donald Trump remain in the White House: A second term would give Trump another shot at repealing the Affordable Care Act.
Why does that matter, in a tax sense? Funding for the ACA — Obamacare — includes a 3.8 percent tax on the investment income of households making over $250,000 a year and a 0.9 Medicare tax on joint-return earnings over $250,000. In 2018, taxpayers making over $1 million paid 72 percent of Obamacare’s investment income tax and 48 percent of the Medicare tax.
Killing Obamacare, in effect, would mean an even greater tax windfall for America’s wealthiest.
But a Biden triumph this November, we need to keep in mind, would not automatically translate into a tax system that has the wealthy paying a much fairer tax share. A President Biden would still need to get his tax plan through Congress, and even a new Democratic Senate majority would not guarantee the plan’s passage. Several more conservative Democratic senators are already pushing a go-slow approach on upping the taxes rich people pay.
“I think we ought to make the decision,” Senator Diane Feinstein from California said last month, “when we have a better sense of where the economy is going.”
Senator Debbie Stabenow, a Democrat from Michigan, adds that she has “no idea” when Democrats would start action on Biden’s tax plan if they gain Senate majority status.
What can get these “cold feet” on taxes moving? The only force that has ever significantly raised taxes on the rich: pressure from the grassroots. That pressure, back in the New Deal era, raised the tax rate on income above $400,000 to over 90 percent. That pressure in 2021 could pass a Biden tax plan.
And that pressure could do considerably more. Biden’s plan would make a powerful impact on income inequality in the United States. But wealth inequality remains an even greater challenge, and the Biden plan includes no wealth tax along the lines that Senators Bernie Sanders and Elizabeth Warren, two of Biden’s primary rivals, spent so much time advocating.
Grassroots pressure could shove that wealth tax onto the political table. And if that happens, the staggering levels of inequality that Ronald Reagan’s 1980 election ushered in might finally begin to seriously reverse.