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Which Tax Hikes Are Most Likely?

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What You Need to Know

  • Personal, trust and estate tax increases should happen in the coming months, experts say.
  • Taxable estates greater than $10 million would be taxed at 50%, amounts greater than $50 million at 55%,
  • Raising the top corporate tax rate to 28% may be something many businesses can live with.

President Joe Biden and members of Congress “are already foreshadowing personal, trust and estate tax increases in the coming months,” according to Alison Hutchinson, managing director and resident tax expert at Brown Brothers Harriman.

Where these proposals end up, however, is negotiable.

As Biden noted in early April in unveiling his comprehensive proposal, The Made in America Tax Plan, to increase investment in infrastructure by, in part, boosting the corporate tax rate: “Debate is welcome. Compromise is inevitable. Changes are certain.”

While it appears that a wealth tax as put forth by Sen. Elizabeth Warren, D-Mass., “is off the table,” Hutchinson told Investment Advisor in early April, “changes to the way the income tax basis of assets are taxed (or not taxed) at death, as well as increases to personal income tax rates on wealthy individuals and changes to the taxation of estates and trusts, are all very much on the table.”

Sen. Bernie Sanders, I-Vt., released in late March the For the 99.5% Act, legislation that would restore the estate tax exemptions to the 2009 thresholds of $3.5 million per individual and $7 million per married couple from the current exemptions of $11.7 million and $23.4 million.

In a shift, larger estates would be subject to higher tax rates. The current 40% tax rate would be raised to 45%. Taxable estates greater than $10 million would be taxed at 50%, amounts greater than $50 million at 55%, and amounts greater than $1 billion would be taxed at 65%, according to the Joint Committee on Taxation.

The same rates would apply for gift taxes, for which the threshold would be lowered to $1 million.

“Introduction of this legislation is a big step forward to significantly strengthening the estate tax,” Frank Clemente, executive director of Americans for Tax Fairness, said in a statement.

During an early April Senate Budget Committee hearing, titled “Ending a Rigged Tax Code: The Need to Make the Wealthiest People and Largest Corporations Pay Their Fair Share of Taxes,” Sanders said that his bill would “demand that the families of the millionaire class not only not get a tax break but start paying their fair share of taxes.”

Sanders also introduced the same day the Corporate Offshore Tax Dodging Prevention Act, “legislation that would prevent corporations from shifting their profits offshore to avoid paying U.S. taxes and would restore the top corporate rate to 35%, where it was before [Donald] Trump became president.”

Likely Changes

Hutchinson noted that “It may be easier for interested parties to negotiate for changes to the estate/gift tax rate (currently 40%), or the exemption from estate/gift tax (currently $11.7 million), where they have a number to debate. The policy negotiations around changes to the income tax basis rules are much more nuanced and complex, and they will take longer to reconcile or could be shelved indefinitely in the interest of time.”

Biden’s Made in America Tax Plan “is relatively unsurprising and targets corporate tax, saving the more controversial proposals relating to individuals, trusts and estates for later this year,” Hutchinson opined.

In her view, the “most interesting and overlooked portion of the Biden tax proposals so far” is the emphasis placed on enforcement.

“We are advising clients to expect an increase in the corporate tax rate and, more importantly, to prepare for audit,” Hutchinson, whose clients include high-net worth individuals and private businesses, relayed.

The IRS’ enforcement budget and, therefore, the agency’s “ability to effectively audit has fallen over the last decade,” she said. However, she said that The Made in America Tax Plan “is part of a broader overhaul of tax administration that would give the IRS the resources it needs to collect the taxes that are owed by wealthy individuals and large corporations.”

Indeed, Greg Valliere, chief U.S. strategist for AGF Investment, said in his April 8 Capitol Notes email briefing, that Biden’s tax proposals “are more than just a debate over how to pay for $2.25 trillion in infrastructure spending. It’s an opportunity to impose major new reforms to corporate tax laws, especially as they apply to foreign income.”

The Biden tax plan is designed “to increase corporate tax revenues, which have fallen to about 1% of GDP, with many firms not paying any taxes after enactment of Donald Trump’s 2017 tax bill,” Valliere said.

It’s possible, Valliere said, that all 50 Senate Republicans vote against Biden’s tax proposal. “There are simply too many controversial provisions; ironically, raising the top rate to 28% from the present 21% is something many businesses can live with, but there are other proposals that are more controversial.”

Biden may have to compromise on a 15% minimum corporate tax on huge corporations and a 21% international corporate tax, Valliere opined.

Further, Biden’s “ability to win passage of a tax bill through the reconciliation process is in doubt — because he’s not guaranteed of winning the necessary votes from all 50 Senate Democrats,” Valliere said.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].