Over the past nine months, one of the largest concerns of clients and investors I talk to has involved the potential tax changes associated with the new administration and Democratic Party majority in Congress.
The rhetoric during the 2020 campaigns was clear, the Democrats intended to raise taxes on some income earners, and the ongoing rhetoric regarding the massive new spending bills only added to the anxiety over potential tax rates.
Well, just this week we began to see some of the tax details associated with Democratic economic plans, and while the road toward passing these plans as they currently stand remains long and uphill, I think enough information has been released that we can begin making better conclusions regarding potential future tax changes.
As stated during the campaign, the Democratic tax increase plan would be focused entirely on higher income earning households and corporations. On the individual side, the most likely primary tax hike moves the top tax rate on taxable income over $400,000 for individual taxpayers and $450,000 for joint filers from the current 37% to 39.4%. Income earners above these ranges would also experience a maximum capital gains tax rate increase from the current 20% to 25%. The Democrats are also proposing a 3% tax surcharge on incomes over $1 million.
On the corporate tax side, House Democrats, the most likely engineers in this situation in my opinion, are proposing a graduated tax, starting at 18% for profits under $400,000 and capping out at 26.5% for profits over $5 million. Before the tax cuts under the Trump administration, the highest corporate tax rate in the U.S. was 35%.
So, first let me say I do not favor any changes that raise federal taxes. My opinion is the federal government is a poor steward of resources and has grown beyond the ability to be effectively managed by human beings. I feel making it larger is not likely to materially benefit local communities, and is only likely to make it less efficient and therefore less effective. Money should stay with the individuals and communities where it is actually earned.
This being said, if as an investor I was losing sleep over what the Democrats had planned for taxes, I could probably sleep a little better tonight. Despite the rhetoric regarding the “rich” and corporations in America not being sufficiently taxed, this tax plan can best be described as a “tweak” in my opinion.
Unfortunately, as a “tweak,” I also don’t understand the math on how these minor tax adjustments would be able to realistically fund the two Democratic spending bills, which total almost $5 trillion, which means Americans can expect more deficit spending and a larger national debt going forward if these large spending bills gain the momentum needed to pass.
At this time, some critical hurdles remain before the spending and tax plans become law, but I would not be surprised to see some sort of movement along the lines outlined above. With razor thin majorities in both the House and the Senate, and at least a couple of key Senators not on board with the proposals, nothing is certain yet. This government haze will be only further exasperated by next year’s midterm elections.
When it comes to things to worry about when it comes to markets and the economy, however, I’m going to put the political risk of tax changes a little lower on the list for the time being.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc atmarc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
