Election Outcomes and Tax Impacts

The most common question I’ve heard from clients after the Election is, “What will the new Taxes be?” Joe Biden’s proposed Tax Bill, a 3 Trillion Dollar Tax Increase, is the largest ever proposed.

He had said repeatedly while campaigning that Taxes would go up if he were elected.  So what does this mean to my clients and me?

Let’s look at where we are now.  The Tax Bill passed by the current President has much lower Tax rates, as opposed to his predecessor.  That idea behind the current lower Tax rates comes from the Reagan theory that lower Tax rates imposed on individuals will stir that individual to put their money into more investing, purchasing, and expanding their business or lifestyle.  That in turn helps the economy move up, providing more jobs and opportunity to other individuals.

It took almost 2 years for the current President to get that Tax Bill passed.  He took office in January 2016,  and the lower Tax Bill was passed in late December of 2017.

Factors to remember right now are that :

(1) we currently have lower Tax rates across the board,

(2) Interest rates are historically low- below 3%, and

(3) that we have the largest debt ratio since World War 2,  as the Federal Bank and the current Administration have tried to prop up business and people through stimulus loans, and Federal Additional money for unemployment during this Pandemic.  (The Federal Bank Governors felt the almost 10 year slow recovery for the 2008 Great Recession was from not moving money into the economy when the economy slowed, which caused the slow decade of economic recovery).

Also in play is who will control the US Senate. Remember, the Legislature writes the laws.  The House of Representatives and Senate make the laws.  The Law still has to be signed by the President, but their veto of a Bill can be over ridden by a large vote in the Senate.

Right now, the House is controlled by the Democrats and the Senate is controlled by the Republicans.  There is a runoff election for the 2 Senate seats in Georgia set to take place in early January 2021.  The outcome of that election will determine whether Republicans still hold the Senate or if the Senate, House, and White House are all controlled by the Democratic party.  If the Senate moves to Democratic control, we can expect a new Tax bill as promised by Biden.  If the Republicans hold the Senate, the parties will have to work together for change and sweeping Tax changes are less likely.

Remember when we talk about Taxes, there are a number of Taxes that effect each of us.  There is Income Tax when we earn it, Sales Tax when we buy it, and Property Tax when we hold it. There are capital gains when we hold it for more than a year and then sell it, and Gift & Estate Tax when it goes to the next generation.   These are just a few of the taxes that effect each of us.

The “Tax Foundation” advises that the Biden Plan would raise Capital Gains Taxes to more than double what they are now. This means that if you sell a stock or house that you have owned for more that a year, the increase in value will be Taxed around 43%, which means that you net 67% of the profit vs you keeping 85% of the profit.  Also Payroll Taxes will go up so that you net less in your paycheck. Corporate Taxes will go up so that what used to cost you $1 may now cost you $1.08 as the seller passes that Tax increase on to you, the buyer.  Also a 15% minimum Book Tax is added to businesses.  That added Tax will be passed on to you so that what you pay for something will increase accordingly.  There will be new Taxes on those doing business overseas.  They estimate this will lead to lower American incomes and greater foreign ownership of American assets.  This will also increase the trade deficit.

The step up in basis disappears so that if you buy a house for $200,000 and it is worth $400,000 when you die, your kids will pay a 43% Tax on the increase in value, which they didn’t have to pay one cent in Taxes before when they inherited from you .  The Estate Taxes will go back up so that if you are worth more that $3,500,000 when you die, your children will pay up to 45% in Taxes on the amount above the $3.5 million. (The Estate Tax exemption was worth multiples of that before). It lowers your Tax breaks for retirement plans, by moving from making them deductible, to using Tax credits instead.  They cap the amount you can claim in itemized deductions.

The Tax Foundation estimates are that these increased Taxes will reduce America’s economy’s size by 1.62%, that they will shrink capital stock by about 3.75%. It will reduce the overall wage rate by 1%,  all of which will lead to about 542,000 fewer full-time American jobs.

So, we will watch the elections in Georgia to see what happens next.  Most of us are old enough to remember when control of the White House and the Legislature was split between the parties, which made everyone work toward the middle.  That was the most common outcome for long periods of time.

As one friend used to say, “We’ll see.”

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At the Law Firm of Steven Andrew Jackson, Attorney and Counsellor at Law, we have helped hundreds of families protect themselves and their loved ones, avoid Estate Taxes and Probate Costs, and keep their Estate Plans current with the law through The Customized Protective Estate Planning Solution™.