US Taxation Moving UP, UP, UP
America seems intent on spending as if it had no future to worry about. The working assumption behind the fiscal excesses appears to be that deficits don’t matter, and that debt will never be repaid anyway. So, let’s SPEND! However, the truth is that somebody always pays. Ultimately, those at the bottom of the wealth pyramid will likely stand to suffer the most. But, in the meantime, those with wealth will be expected to foot the bill which will arrive in the form of higher taxes.
Washington appears convinced that the latest $1.9 trillion stimulus bill just wasn’t enough. The Biden administration already unveiled plans for trillions more in infrastructure spending. Then, add on top of that the President’s campaign promises of reforms and even more funding for education, welfare, and healthcare, all of which are likely to require trillions of dollars more in new tax revenue. Inevitably, this will all lead to more debt, higher inflation and, of course, more and higher taxes.
Taxes in America are on the rise – both in terms of scale and scope.
,Taxation trends to expect in the U.S.
The following items are just a few of the tax proposals and possible changes on the horizon – both private and corporate. I may very well have missed a few; it’s hard to keep up these days and some of the numerous and creative congressional tax proposals seem to be discussed only in private. Yet here are some of the most popular ideas:
- Paring back tax preferences for so-called pass-through businesses, such as limited-liability companies or partnerships;
- Increasing the income tax rate on individuals earning more than $400,000 from 37% to 39.6%;
- Taxing capital gains and qualified dividends at ordinary income tax rates on annual income above $1 million (39.6%);
- Elimination of a step-up in basis at death. The step-up in basis minimizes capital gains tax on the disposition of appreciated assets by the heirs. Elimination of this savings provision could be detrimental especially for assets that have appreciated substantially, have been held for a long time, or where finding historical basis can be difficult;
- Reduction of estate tax exemption from $11.7 million to “its historic norm”, whatever that means. A reduction from $11.7M million io to $3.5-$5 million has been considered as plausible;
- Increase of the estate tax rate from 40% to 45%;
The only difference between death and taxes is that death doesn’t get worse every time Congress meets. ~ Will Rogers
- President Biden and congressional policymakers have proposed several changes to the corporate income tax, including raising the rate from 21% to 28%. An increase in the federal corporate tax rate to 28% would raise the U.S. federal-state combined tax rate to 32.34%, the highest in the OECD and among Group of Seven (G7) countries, harming U.S. economic competitiveness and increasing the cost of investment in America; or
- Imposing a minimum tax of 15% on the book income of large corporations, which targets gaps between financial and taxable income that generally exist because the rules for taxation differ from standards for reporting income to shareholders. Such a minimum tax would likely introduce additional complexity and distortions into the tax code and generate relatively little tax revenue, in part because firms have a degree of flexibility in reporting book income. The tax would potentially undermine current-law investment incentives as well as those proposed by President Biden, such as the “Made in America” tax cre
Adding to the above, Senator Bernie Sanders has just introduced a Senate Bill proposing to change various tax exemptions, many in line with Biden’s campaign promises listed above. Sanders’ “99.5% Act” proposes, amongst other things:
- To reduce the estate and generation-skipping tax exemptions from $11.7 million per person to $3.5 million per person;
- To cut the per person gift tax exemption from $11.7 million to $1 million;
- To raise the top rate of estate tax from 40% to 45-65%, depending on the size of the estate;
- To reduce the effectiveness of trusts for estate planning, e.g. grantor trust exemptions and step-up in basis; or
- To limit valuation discounts for gifts of interests in closely held businesses.
Whether, and to what extent, Biden’s tax agenda or Sanders’ proposed bill will be adopted might still be unclear. However, this clearly gives you an idea of the direction taxes in the USA will be going…and that seems to be up!
Although most taxes target wealthy individuals, the reduction of estate tax exemptions could end up capturing many other individuals who currently do not have to think about the estate tax.
There is little doubt that the hunt for tax revenue is on, especially considering the recent acceleration in debt accumulation that can only add to the urgency and result in a faster introduction of tax reform.
Wealthy families and individuals would be well advised to stay attentive and start considering whether adjustments to their wealth structures are needed.