Who didn't see this headline from Bloomberg Wealth coming? "Rich Americans Who Were Warned on Taxes Hunt for Ways Around Them."
I suspect most of these people not only voted for Joe Biden, but many of them have also contributed mightily to his campaign and are still happy to have done so.
Why? Because they're largely not too worried about promises and presidential proposals for higher taxes. They know where tax laws are actually written - by a few members and staff on the tax-writing committees in Congress: Senate Finance and House Ways and Means. That’s where the real work happens. Biden’s tax plan is just the starting gun in a horse race. And the betting windows are open.
There are bright lines between evading taxes (illegal) and avoiding them (legal, if unfair).
Then, of course, there’s the matter of who, exactly, is wealthy? “Wealthy” is clearly in the eye of the beholder. And Democratic eyes may be peering lustily at you. The truly wealthy already employ smart tax lawyers and financial advisors who are experts at finding ways to avoid taxes. Everything from "insurance products" to deferred income strategies has been around for a while. And we’ll see how noisy “tax the rich” leftist groups like the Center for American Progress are when the tax laws are turned on some of their wealthiest donors.
The truly wealthy also derive income from a variety of sources. Jeff Bezos may be worth over $250 billion, but much of that is based on Amazon’s stock value. He doesn’t pay a dime in taxes on that wealth until he sells stock or derives personal income from it (such as dividends that are not reinvested, but Amazon doesn’t pay dividends). And then again, there are nifty ways to evade taxes while supporting your favorite left-wing causes. Don’t expect any changes in this particular strategy, since powerful nonprofit organizations benefit from it.
Expect some new, creative strategies to emerge. And some very smart tax lobbyists will know how to help congressional staff word the new law in a certain way to ease the way for those new strategies to pass muster.
What they can't avoid, they can afford.
Tax lobbyists, many of them former Members of Congress and congressional aides with expert knowledge of tax law and great Capitol Hill connections, have already been lining up clients in anticipation of the Biden infrastructure and tax plan. We'll see it in future Lobby Disclosure Act (LDA) reports, probably this summer.
And then there are the Washington and New York campaign fundraisers, especially for members of the tax-writing Senate Finance and House Ways & Means Committees. Corporate Political Action Committee (PAC) and contributions and big personal checks from senior executives have been on "hold" since the January 6 Capitol incursion. We will suddenly see campaign money spigots opened. We'll have to wait for the July release of the next round of Federal Election Commission (FEC) financial disclosure reports gauging just how much, with a special focus on those tax-writing legislators. With Democrats writing the new tax law and tough re-election campaigns awaiting in a decennial redistricting cycle, money will talk, if not shout.
And we’ll see if any of our corporate media will awakened from their post-Trump slumber to write about them. A few will. Not holding my breath.
And you know what that ultimately means when the new tax bill is delivered to the White House. The only people who ultimately will pay those higher taxes will be those who can't afford to hire lobbyists or creative financial advisors to help duck, or at least defer, higher taxes. After all, companies, in particular, do not pay taxes. They collect them in the form of higher price tags. Which the coming inflation (it is actually already here) will help mask.
Some of my Democratic friends will remind us of the “Trump Tax Cuts” - which Biden and other Democrats promised to repeal - and the lobbying and fundraising that went along with that. Sure, that happened, but tax rates were broadly lowered and simplified, except for the cap placed on the deduction for state and local taxes (SALT). Mostly wealthy taxpayers in high-tax states like New Jersey (nation’s highest property taxes) and New York screamed when the final bill imposed a $10,000 cap on those deductions.
Disclosure: the SALT cap hurt me a lot. I lived in Pennsylvania at the time, and my property taxes alone (never mind income and other taxes) well exceeded that. But even in a state like New Jersey, most residents were not affected by the cap established by the 2017 law. But the wealthy screamed. So guess whose squeaky wheel is about to be greased with the elimination of that cap? You guessed it - the wealthiest taxpayers and the high-tax states in which they live.
Lower-taxed state residents will then wind up paying a disproportionate slice of the federal pie. I’ll let the Heritage Foundation explain how.
“Before the TCJA (Trump-era Tax Cuts and Jobs Act), a taxpayer in New York making between $50,000 and $75,000 a year deducted on average $3,375 worth of state and local taxes from his federal taxable income. A taxpayer in Tennessee making the same income only deducted $924 on average, which increased his federal taxes by about $400 compared to his identical New York counterpart.4
“The disparity among high-income taxpayers was even larger: The average millionaire living in New York or California deducted more than $450,000 worth of state and local taxes; the average millionaire in Texas deducted only $50,000 and therefore paid close to $180,000 more per year in federal taxes.5
“Such disparate treatment is unfair, especially considering that the federal government provides the same services to taxpayers with similar incomes in New York, Tennessee, and Texas.”
Most high-tax states vote Democratic; most low-tax red states vote Republican. Democrats control the White House and (marginally) both houses of Congress. The winners and losers are not hard to figure out.
Maybe the wealthy should have screamed not at Congress but their state government officials responsible for the high state and local taxes in the first place? At least those who haven’t already voted with their feet (along with their private jets and limos) to lower tax states.
Most it seems are happy to tax the rich. Biden himself (and other Democrats) have been promising to limit tax increases to people with incomes over $400,000 per year. Read that last sentence carefully. Assets that don’t look like incomes are on the block as well, including your family business or farm that you may want to pass long to a child via inheritance. Some Democrats think that is a tax “loophole.”
We know that President Biden will likely use much of his forthcoming State of the Union address (can he actually deliver it?) this week to push his infrastructure plan, and pay for it by eliminating Trump’s “tax cuts on the wealthy,” or some other canard to reflect his 2020 campaign promise. He will also finally present his official budget proposal, which kicks of the budget and reconciliation season for Fiscal Year 2022, which begins Oct. 1st. Despite higher taxes, don’t expect federal deficits and public debt, now approaching $30 trillion, to go down.
And as we now know, federal budgets not only do not require a presidential signature, they can’t be filibustered under Senate rules. And the reconciliation bills that follow do require a presidential signature (they contain real tax law changes to pay for spending), are also exempt from Senate filibusters. They simply need a unified Democratic caucus (or, a disloyal Republican to overcome each wandering Democrat, if there are any). We now know that Senate Democrats can use more than one reconciliation bill if necessary to get much of their wish list through Congress.
A budget resolution will likely pass in May; reconciliation(s) will take a while longer - maybe not until the Fall. It will depend on how the votes shape up. A lot of drama has yet to play out.
One thing is certain; there will be surprises in the new tax law (if they are able to enact one) that won’t show up until well after the new law is signed. As Nancy Pelosi once famously said, “…we have to pass the bill so that you can find out what is in it...” Here’s my “surprise” prediction: federal marijuana legalization. As a “revenue raising” measure, of course.
If intelligent and thoughtful patriots were in charge (like us!), the conversation would be on resizing and rescoping our federal government to its constitutional role (looking at you, 9th and 10th Amendments), figuring out what that would cost, and then revamping our tax system to pay for it. Like, taxing things you want less of (like consumption, especially unwelcome pollution, worthless federal programs and agencies, and waste) and taxing less things we need and want (like, income and middle class wealth). I would happily trade income taxes for a carbon or other consumption taxes with exemptions for essential items (food, etc.). A topic for another day, or maybe a very different Congress with a very different President.
But we’re not so lucky. All those federal programs have constituencies that are well organized, funded, and noisy (there’s that squeaky wheel again). And since you have other priorities, like paying bills, raising your kids and working off home mortgages, you don’t have the time to match the power of those squeaky-wheeled groups. So, who is fighting for you?
Meanwhile, pay attention. Your money is on the table. Or more accurately, you are on the menu.