Uncovering Four Ways That Biden’s American Families Plan Attacks Your Wealth

As shown above, the “wealthy” (limited to only the top 1%) pay a staggering 40% of all tax revenue, as reported by the IRS.  When you include those Americans making above $200,000 per year as “wealthy,” it becomes 60%.  This is after the 2017 Tax Cuts and Jobs Act “reduced tax bills for the lowest-income Americans by 10% while only cutting taxes for the top 1% by 0.04%” according to the Heritage Foundation. Reasonable minds may differ on what “fair share” amounts to, as—arguably—certain demographics are able to take greater advantage of the tax system than others.

How Does the AFP Tax Plan Attack the Wealthy

1. First, the Biden Administration proposes raising the top marginal income tax rate from 37% to 39.6%. This would apply to income  over $452,700 for single or head of household filers and $509,300 for joint filers.  This is not good news for well-compensated individuals or joint income families entering the top tax bracket approximately $105,000 sooner than they would otherwise.
2. Next, the Biden Administration proposes taxing long-term capital gains and qualified dividends at the ordinary income rates for taxpayers with taxable income above $1 million. When combined with the proposed new top marginal rate of 39.6% and the 3.8% Net Investment Income Tax (“NIIT”)—the flat tax affectionately known as the “Obamacare Surcharge”—the  top marginal rate becomes a whopping 43.4% .
3. We uncover a “hidden” attack on your wealth in the tax on unrealized gains at death above $1 million ($2 million for joint filers, plus the current law capital gains exclusion of $250,000/$500,000 for primary residences).  This is a rally point for the advocates of closing tax “loopholes.”  Sadly, many Americans —especially middle-class taxpayers—pass wealth by transferring appreciated property upon the death of a loved one.  The transfer of a family home, family farms, or other appreciated property with low basis upon the death of a loved one would become a target-rich environment of previously untouchable gains.
4. The final attack we uncover is hiding in the expansion of previous taxation to which we have already grown accustomed. In addition to the other points previously discussed, the Plan would apply the NIIT 3.8% to  active pass-through business income  above $400,000.  This wealth neutralizer hides in plain sight in a proposal to close perceived “gaps” in the tax law between the FICA and SECA taxes.  There are currently four identified “gaps”:
   1. distributions to active S corporation shareholders;
   2. distributions to active limited partners;
   3. gains from the sale of business property from active non-trading businesses (like an MRI machine used by a radiology practice or a truck used by a construction company) which might not be subject to NIIT for active partners in the business; and
   4. active LLC members.

How Might the AFP Tax Plan Do More Harm Than Good

The Administration makes its projections on eight (or ten) year plans for revenue.  However, the revenue to be raised requires fifteen years to reach its funding goal (in a vacuum).  Thus, the AFP begins with a five-to-seven-year shortfall.  Unfortunately, even if the laws backdate eligibility or claw back income to fall under the future laws, it is unlikely to catch everyone. We wonder how many Fortune-level companies will pay their Big 4 accounting firms to find a way to pay some tax in year one only to plan an escape after that?  If some of the biggest companies do so, the AFP loses tax dollars during the next nine tax years.

Corporations with sufficient revenue at risk are likely to go offshore (again) to take advantage of better tax treaties. Apple’s (and others’) use of the Dutch-Irish Sandwich should provide a good example of the lengths a corporation will go to limit or reduce taxation by even just small percentages.

The truly wealthy are likely to move assets and income to creditor protection jurisdictions and take advantage of legitimate investments with income tax benefits for their investments and wealth. Individuals will find other ways to pass income and transfer wealth or push off selling businesses/stock/houses/etc. The tax on the wealthy may face significant hiccups in tax collection, even with a doubled budget for the IRS.  This could be why the Biden Administration is putting such a priority on global corporate and minimum taxes.  With all the tax minimization options available to wealthy individuals, it is questionable how we will pay for these social programs.

Likely scenarios resulting from Biden’s AFP Tax Plan

The tax starts to trickle down.  We are possibly seeing it now with the lowered upper income bracket.  Increased corporate taxes do not mean less money to the wealthy. It usually means higher prices, increased costs passed on to consumers, and more entry level jobs being handled by robots or self-service kiosks (think Wal-Mart self-check and McDonald’s ordering kiosks).