Joe Biden campaigned on the platform of raising taxes on the top 1% of earners in America, yet six months into his administration, there haven’t been any increases thus far.
The main pillars of his proposal are to increase the corporate tax rate from 21% to 28% and to increase taxes on married couples earning more than $400,000 per year ($200,000 for individuals) from 37% to 39.6%. For those making $1 million or more, your long term capital gains tax rates would increase from 20% to 39.6%, effectively doubling.
There are few reasons for the proposal running out of steam. The first is GOP opposition, as well as a number of economists warning that raising taxes now could jeopardize the economic recovery.
Former George W. Bush Treasury official, Tony Fratto, says that the chances of big tax reforms in the near term seems reduced. There is a fear that tax reforms could squelch the growth of the economy as corporations are still trying to battle their way out of the quagmire of the Covid-19 recession.
When corporate tax rates go up, those tax increases are typically passed on to consumers.
We can look at major Wall Street players and how they are reacting or preparing for the proposal to get an idea of what the future may bring. Blackrock is mildly bullish on the tax rates going through with a number of senior strategists believing it to be likely but still hedging their bets.
JP Morgan believes that Joe Biden will not be able to deliver on his tax proposal increases, but the discussion of increasing taxes may put a damper on market returns.
Mitt Romney believes tax increases are off the table. Being able to pay for infrastructure bills with increased taxes is going to be extremely difficult to pull off.
Tony Fratto says that borrowing is probably going to be how Biden will pay for all the various bills being proposed. As long as Democrats and Republicans disagree on how to pay for expenditures, borrowing is the easy solution.
The US government has to refinance its loans each year, and they are directly impacted by interest rates. Interest rates may be low now, but they won’t stay that way forever.
If Joe Biden is going to push through his tax proposal, he has to do it soon. As a president, when you can’t get things done in the first 100 days to one year, they tend to become lame ducks leading up to the next election.
Biden is hoping to get all his initiatives done in the first year because polling indicates that Republicans will likely take back the House and the Senate. If he doesn’t push it through soon, he may not have a chance at all.
In terms of the Power of Zero worldview, this means that the status quo is likely to be maintained and that the Trump tax cuts will expire Jan 1, 2026. You have 5 years to reposition your assets from tax-deferred to tax-free.
This isn’t set in stone yet, we have until the end of the year before it becomes clear on what’s going to happen with Biden’s tax proposal.
Mentioned in this Episode:
Biden’s plans to raise taxes on corporations and the wealthy are losing momentum – https://www.cnbc.com/amp/2021/07/07/biden-tax-plan-corporate-capital-gains-and-income-hike-uncertain.html