By Matthew Gaude & Shawn McGuire
Although we’re a year away from the next presidential election, the campaigning has already been going on long enough that the candidates have become familiar names and faces. But while the candidates themselves are familiar, not all of their proposals are. What is it they actually want to do as president? How would their proposals affect you and me?
Today we are going to look a little deeper look at the two front-runners, Elizabeth Warren and Joe Biden. What are their tax proposals? How might they affect your financial plan?
Elizabeth Warren’s Tax Proposals (1)
While many politicians offer vague promises on the campaign trail, Elizabeth Warren has developed a reputation for having concrete plans. Her penchant for planning has extended into the realm of taxes, and she has made a number of proposals to date. Here they are:
Like most of the Democratic candidates, Warren is proposing to tax the rich to pay for her projects. She would like to impose a 2% tax on every dollar of net worth a household has above $50 million. The tax would increase to 6% for households with over $1 billion in net worth which she doubled in November to help pay for Medicare for All. The Ultra-Millionaire Tax would affect approximately 75,000 individuals and raise between $2.6 trillion to $2.75 trillion over a decade, according to the economists who helped Ms. Warren develop her plan.
Americans would not be able to renounce their citizenship to avoid the taxes, either. Anyone with a net worth over $50 million who renounced their citizenship would be subject to a 40% “exit tax.”
Excessive Lobbying Tax
Warren has proposed an Excessive Lobbying Tax to help prevent the excessive influence of corporations and trade organizations in government. Firms that spend between $500,000 and $1 million on lobbying would be taxed at a rate of 35%. The rate would increase to 60% on firms that spend over $1 million and 75% on firms that spend over $5 million.
Real Corporate Profits Tax
Warren would like to impose an additional 7% corporate tax on every dollar of profit a company reports over $100 million. This would be in addition to the current corporate taxes which affects approximately 1200 of the most profitable firms in 2018.
Increased Social Security Taxes
Under current law, Social Security taxes are only imposed on a limited amount of income, $132,900 in 2019. Warren’s proposal would add a 14.8% tax on individual wages above $250,000 and on net investment income for individuals making more than $250,000 and families making more than $400,000.
Repeal of Tax Cuts & Jobs Act
Warren has pledged to repeal the Tax Cuts & Jobs Act if elected. A major motivator for that is to restore the previous corporate tax rate.
Gun & Ammunition Tax
Taxes would be raised on guns and ammunition as well. The tax on guns would increase from 10% to 30%, and ammunition would be taxed at a rate of 50%.
Military Contractor Carbon Tax
Part of Warren’s climate change agenda is to have the military achieve carbon net-zero emissions by 2030. In order to achieve this, she would tax military contractors who do not meet this standard 1% of the total value of their contract.
Capital Gains Tax
Currently, capital gains are taxed only when an asset is sold and then the gain is “realized,” and those gains escape income taxes at death. That means gains on assets that are never sold are never taxed, so wealth can grow without triggering any income taxes.
Any unrealized capital gains outside of retirement accounts would be taxed at 39.6%, just like ordinary income, plus an existing 3.8% investment-income tax. Add to that her new 14.8% investment income tax to bolster Social Security, and state taxes, combined tax rates could reach 70% in California and New York City.
Beyond the 75,000 households that would be hit by the wealth tax, Ms. Warren’s capital gains tax plan would transform investing rules for the top 1%, about 1.5 million households. Ms. Warren estimates her tax on unrealized gains would raise $2 trillion over 10 years, citing New York University professors Lily Batchelder and David Kamin.
Personal & Corporate Tax Rates
Ms. Warren wants to return the top income tax rate to 39.6% from 37%. She would also repeal the tax cuts from the 2017 Tax Cuts & Jobs Act (TCJA) as well as the 20% income exclusion for pass through firms.
Private Equity Firms
Warren has yet to make any specific proposals but has vowed to reform Wall Street. She promised to change the tax rules so that firms “that make bad investments would be held accountable instead of walking away from the wreckage with millions in fees and payouts.” (2)
Medicare For All
Elizabeth Warren is a supporter of Bernie Sanders’ “Medicare for All” proposal. While she has not proposed any specific taxes to pay for it, it would likely be necessary since the program could cost up to $32 trillion over 10 years. To date, she has not established a plan on how to pay for Medicare for All without raising tax rates on all tax payers, not just the “Ultra Rich.”
Joe Biden’s Tax Proposals (3)
Like most of the other candidates, Joe Biden does not have as specific and detailed tax proposals as Elizabeth Warren. He has promised a “fairer tax code” (4) and spoken out against tax increases for the middle class. However, he has also proposed a healthcare program costing $750 billion without mentioning how he would pay for it. As of right now, these are the specific tax proposals that Joe Biden has made:
Individual Income Tax
Biden has vowed to raise the top federal income tax rate from 37% to 39.6%, where it was before the Tax Cuts & Jobs Act was passed. He has not stated that he would undo the other tax brackets.
Capital Gains Taxes
One of Biden’s main tax proposals regards capital gains taxes. He wants to increase the top marginal rate from 20% to 39.6% for taxpayers that earn more than $1 million a year. He also wants to eliminate the “step-up in basis” which allows people to pass their capital gains to their heirs upon death without tax.
Wall Street Tax (5)
While no official proposals have been made, it is reported that the Biden campaign is considering a tax on financial transactions, such as the sale of stocks and bonds. It is yet to be seen if he will branch out in this direction as many of his opponents have.
Another proposal of Biden’s relating to taxes is actually a tax cut. He would like to create a $5,000 credit for caregivers of elderly relatives and expand the current child tax credit to $8,000. That tax credit would be four times what it is now, which is double what it was before the Tax Cuts & Jobs Act.
The Potential Tax Increases to Come
Democrats are proposing to raise the regular income-tax rate, the corporate tax rate, the capital gains tax rate, the dividend tax rate, the death-tax and payroll tax rates, while creating a new wealth tax, a new financial-transactions tax, a new carbon tax and a new pharmaceutical tax, even as they would repeal 100% business expensing and the 20% income exclusion for pass-through firms. Even if Ms. Warren or another Democrat were to be elected President, it is unlikely to turn their entire agenda into law because of obstacles in Congress and possibly the courts. Still, for the wealthiest investors, the plans are a warning that basic rules of taxes may be changing.
Millionaires Surtax Act
Maryland Senator Chris Van Hollen and Virginia Congressman Don Beyer unveiled the Millionaires Surtax Act, a plan to increase taxes on the top 0.2%. The bill would put an extra 10% tax on individual income above $1 million, or $2 million for married couples. This surtax would apply regardless of the income’s source, whether from long-term capital gains, currently taxed at a top rate of 20%, or wages, taxed at rates of up to 37%. The legislation’s backers say it would raise $635 billion over a decade, citing an estimate by the Tax Policy Center. (6)
Is Your Portfolio Prepared For These Candidates?
There is no way to know who will win the election next fall or even what tax proposals they will be able to pass once in office. However, it is important to understand what they are proposing so that you know what to expect and understand the direction that public sentiment is turning in regards to taxes.
If you are wondering how these tax proposals might affect you or if your portfolio could withstand them, call our office at 770-552-5968 or email [email protected]. You can also click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
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