Economic Reflections - Biden Tax Proposals

Posted by Elle Seybold on Tuesday, August 25th, 2020 at 6:44pm.

It has come to my attention that many folks are not aware of Biden’s tax proposals.  Being an unconventional gal, and an economist, I tend to focus on the economic side of issues.  Hence my focus on taxes for the election – especially given the state of the economy.  Not to mention the proposal's will significantly impact the real estate market. 

Please know I am not a Trump fan by any means – this is not written to support him whatsoever – this is simply to disseminate and digest Biden’s position as his proposals will be the largest tax hikes in U.S. history. 

Below is an outline of the major components:

  1.        Statutory tax rates would increase.  As such, the top individual income tax rate would rise from 37% to 40%.  
  1.        Impose a 12.4% Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000. 
  1.        Eliminate the payroll tax cap so every dollar earned will be subject to Social Security taxes. 
  1.        Phase out Section 199A for high-income households - Sec. 199A allows taxpayers to deduct up to 20% of qualified business income from a domestic business operated as a sole proprietorship, partnership, S corporation, trust, or estate.
  1.        Limit itemized deductions.  Caps the tax benefit of itemized deductions to 28% of value, which means that taxpayers in the brackets with tax rates higher than 28% will face limited itemized deductions.
  1.        Raise business income taxes by both increasing the corporate tax rate and broadening the business tax base.  Corporate income tax rate would rise from 21% to 28%.
  1.        Increase the tax rate on foreign profits U.S. multinational corporations earn by reducing the deduction for global intangible low-taxed income (GILTI) to 25%.  As a result, the effective tax rate on GILTI would rise to 21% – double its current level of 10.5%.
  1.        Enact a 15% minimum tax on larger corporations’ book income.  It is important to understand that book income is not profits (which is what is currently taxed).  If income doesn’t result in a profit you don’t have a tax today.  A company may not have any real income but would still be taxed under this proposal.  It will be interesting to see how they come up with money they don’t have.  Worth noting, the constitution allows for a tax on profits only – a tax on income is unconstitutional. 
  1.        Dividends & capital gains:

a)   Will be taxed at the ordinary income tax rate of 39.6% percent on income above $1MM, an increase from 23.8%. 

 b)  Eliminates the step-up in basis for capital gains – which adjusts assets to current value upon someone’s death. 

 c)   Capital gains and dividends will now be subject to Social Security taxes.

 d)  Quick workout on the numbers –

Current regime: Business earns $1 of profit, income, they pay a 21% tax = $0.79 remain to pay dividends.  The shareholder pays 24% tax on his dividends.  Left with $0.60 of the $1.  Effective tax rate is 40%. 

Proposed regime: Business profits taxed at 28%, leaving $0.72.  Shareholder pays 40% on that, left with $0.43 on the dollar earned.  That means corporate taxes are actually at a 57% tax rate significantly reducing after-tax income and thus corporate valuations.

  e)  When the capital gains and dividends tax of 40% is combined with the Social Security tax and elimination of the Social Security cap, it will raise the rate from 24% to 55%, a 130% increase.  Which means that business tax rates will rise to over 60%, leaving only $0.39 on the dollar earned.  Massively devaluing the U.S. stock market.

  f)  The elimination of a step-up in basis will dramatically reduce the ability of people to pass assets (property, businesses, etc) to their heirs. 

  g)  These proposals effectively kill the ability of small businesses to be passed on and leave corporations or their shareholders with barely $0.39 on the dollar – and that’s before the states take their pound of flesh.  In California, which has a 13% state tax, businesses will be left with only $0.32 on the dollar, a 68% tax on business earnings. 

10.      Eliminate the 1031 exchange in real estate.  The 1031 allows real estate owners to roll forward their capital gains on a sale without taxation if they purchase a similar, but higher value property immediately after the sale.  The basis will continue to roll forward and no taxes will be paid – allowing people to build up property portfolios.  If the owner dies, the capital gains tax will never be paid as upon death the basis is adjusted, therefore no capital gains.  This is not to say they are free from taxation; their heirs will have to pay the estate tax.  Under the Biden proposal, a person will have to sell a property, pay taxes on the gain and buy the next property with after-tax dollars.  This is a double whammy for real estate buyers as the tax break is eliminated and the capital gains tax rate is going up.

11.     Estate taxes (already at 40%), will increase markedly as a result of the elimination in step-up and the increase in capital gains rates.  Now those inheriting will be forced to pay the estate tax and the capital gains tax.  Most individuals will likely not be able to afford those taxes and will be forced to liquidate the estate and be left with pennies on the dollar.  I’m ignoring the fact that estate taxes are unconstitutional to begin with – the constitution forbids the government from directly taxing without apportionment (16th amendment allowed for income tax, but there was no amendment for estates).  In 1916 the courts got around this bit of the constitution to impose estate taxes by saying that passing on one’s estate was a privilege and not a right.  Really?  Don’t you own your property?  If you own your property you can do with it what you will.  The government was created to secure private property rights after all.

12.     Establish a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure; expands the New Markets Tax Credit and makes it permanent; offers tax credits to small business for adopting workplace retirement savings plans; expands several renewable-energy-related tax credits and deductions and ends subsidies for fossil fuels.

 

According to the Tax Foundation General Equilibrium Model, Biden’s tax plan would reduce the economy’s size by 1.51%, reduce the wage rate by 1% and lead to 585,000 fewer jobs.

 

I’m not going to opine on what I think is right or wrong, I simply want you to be informed.  You determine what makes the most sense for you!

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