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Biden’s Plan to Take More of Your Money

November 13, 2020 By Jeremy Jones, CFA

Vice President Joe Biden to deliver the keynote address at the Caribbean Energy Security Summit, at the U.S. Department of State in Washington, D.C., on January 26, 2015. [State Department photo/ Public Domain]

If Mr. Biden takes office with a Republican-controlled Senate, the most damage he can do will come via the regulatory channel. Regulatory overreach has a big impact on economic growth. Obama proved that. But the biggest threat to your personal wealth is from the legislative side. A Democrat-controlled house, Senate, and White House would give Biden a much better chance of passing his growth-smothering tax program plan. The Democrats will control both the House and White House (assuming Biden wins). The Senate is still undecided pending two runoffs in Georgia that take place early next year. If Biden’s tax plan is to be stopped, Republicans must win at least one of the Georgia Senate races.

Successful implementation of Biden’s tax proposals would turn a “could have been worse” election outcome into a “we have a problem” outcome.

Biden wants to hike taxes on small and large businesses, individuals, and dead people. Yup, Biden hopes to eliminate the step-up in cost basis at death. Today, if you buy and hold shares in a company for decades, and pass those shares to your heirs, neither you nor your heirs pay taxes on the capital gains. The basis for your heirs is stepped up to the value of the shares on the date of your death. This helps capital move more freely and on the basis of economic merits as opposed to tax policy. Mr. Biden would eliminate that which more than anything looks like a handout to tax/estate attorneys and insurance companies.

A Biden administration would also target individuals earning more than $400,000 per year. He would curb deductions for individuals making over $400,000, make them pay more in Social Security tax even though their benefits wouldn’t increase (thereby turning Social Security into a welfare program), and raise the capital gains tax rate even though decades of evidence show that higher capital gains tax rates do not result in additional revenue.

He would also raise taxes on corporations, which isn’t going to help your retirement portfolio or the economy.

All in all, a pretty disturbing mix of policy proposals, and there are plenty more bad ideas not even covered here.

Some investors are jockeying with their portfolios in anticipation of Biden’s tax proposals. This isn’t a great idea. The outcome of the Georgia election has not been decided, and while many Democrats may be on board with Biden’s tax proposals, a one-vote majority in the Senate means the shape of his tax policies may change even if the Democrats win both seats in Georgia. Making an investment decision based solely on tax policy is rarely a good idea and when those decisions are made on possible tax policy, they are an even worse idea.

The WSJ has more on Biden’s bad ideas.

Winning both Georgia runoffs would give the Democrats 50 Senate seats, with the vice president breaking the tie. If this happens—and it’s far from certain—Democrats would be able to act unilaterally for the first time since 2010.

“They’ll likely push hard for major tax increases on businesses and high-income, high-net worth households,” says Kyle Pomerleau, a resident fellow who analyzes tax issues for the American Enterprise Institute.

Yet legislation is always unpredictable, and so are effective dates. Even if tax changes happen, they might not apply until 2022, leaving time for planning next year.

Mr. Biden has promised to raise taxes on the richest, cut them for others, and raise benefits for the lowest earners. In general, the incoming Biden administration draws the line at earners with more than $400,000 of annual income, which is higher than the Obama administration’s threshold of $250,000.

Mr. Biden’s team hasn’t released a comprehensive, detailed list of proposed tax increases. So the Tax Policy Center, a Washington research group headed by a former Obama administration official, has assembled a list based on campaign statements, queries to Mr. Biden’s staff and logical inferences.

This means the proposals are fluid, but two of them could affect some people who earn less than $400,000 a year.

The first would tax capital gains on investments held at the time of a taxpayer’s death, such as stock or real estate. This is a radical change, as current law treats such gains as freebies.

Here’s why. Say that John owns shares of XYZ stock worth $200 each that he bought for $10 many years ago. If he dies in 2020, he owes no capital-gains tax on $190 of growth, which is called the step-up. If John’s heir Jane sells these shares for $201 each, she would owe tax only on $1 of gain per share, saving tax of up to about $45 a share.

The Biden policy team hasn’t specified what circumstances would trigger an exemption to this rule. But assuming a $400,000-income threshold, John’s estate could owe capital-gains tax on the $190 increase per share to the extent that the gain pushes his income above that amount.

Read more here.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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