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Death and Taxes, Vol.2

September 07, 2021

As Benjamin Franklin wryly noted, taxes are inevitable. A more recent development seems to be the inevitability of our politicians messing with the US tax code.

Reports from Washington DC suggest that the House Ways and Means Committee could publish a $3.5 trillion social policy bill this week, which could take the top marginal income tax rate from 37 to 39.6%. Congress has generally been hesitant to impose tax increases retroactively, but as proposed, these new tax rates could take effect as early as the date the bill was published. Some proposed increases include taxing long-term capital gains at ordinary income rates for those with taxable income above $1 million and expanding the 3.8% net investment tax to all sources of income over $400,000. Senate politicians are discussing their own wide range of tax proposals, including levies on stock buybacks, carbon emissions, and executive compensation.

The two chambers would need to reconcile any differences and pass the compromise package before any legislation makes it into law. Even so, there seems to be a general view that some provisions will be passed. “You’re going to see a tax increase no doubt,” says Pamela Lucina, head of the trust and advisory practice for Northern Trust. “Everything is sort of fair game.”

The ultra-wealthy are clearly in the crosshairs, and there seem to be two targets in mind. First, to increase actual tax dollars. For example, one idea is that the ultra-wealthy should pay taxes on unrealized capital gains above $1 million (single filers) or $2 million (joint filers) at death. And second, to rein in some of the popular estate planning techniques. The “For the 99.5%” Act, proposed by Senator Bernie Sanders, suggests a reduction of the estate tax exemption to $3.5 million and the gift tax exemption to $1 million, as well as setting minimum term limits on grantor-retained annuity trusts. In addition, the House Ways and Means Committee may seek to limit the use of valuation discounts for reducing the value of assets held in closely held family businesses for estate and gift tax purposes.

Alongside proposed increases in tax rates, there is also discussion about increasing the size and scope of the Internal Revenue Service. The American Families Plan includes funding for increased income tax enforcement and reporting standards for financial institutions to include accounts with as little as $600 in annual inflows and outflows. The justification is that stricter enforcement could raise as much as $200 billion.

Whatever is proposed, there is still a long legislative road ahead. Some of the initial ideas will likely never see the statue book given there is significant opposition in both houses.

One final note… those seeking to increase tax rates continue to say that they will not raise taxes on those making less than $400,000 a year. No doubt Mr. Franklin would have some pithy comment on the track record of politicians who have made this sort of commitment in the past.

Richard Rushton