What Biden’s Proposed Tax Hikes Mean for Average Americans
After signing the $1.9 trillion coronavirus stimulus package into law, President Joe Biden is proposing several tax increases to help pay for mounting government debt. The Committee for a Responsible Federal Budget reported that the budget deficit could exceed $3 trillion again this year.
The Congressional Budget Office reported that the government hit a record $3.1 trillion deficit in 2020. Prior to the American Rescue Act passing, the CBO projected the deficit for 2021 would drop to $2.3 trillion, but the new aid package could change that if measures aren’t taken to increase government revenue. Biden is looking to pay down that debt through higher taxes, largely for corporations and high earners. If passed, this would be the first major tax hike since 1993.
An Overview of Biden’s Tax Hike Proposals
Provisions of the proposal include an increase in the corporate tax rate from 21% to 28%, and an increased tax rate of 39.6%, up from 37%, for individuals earning more than $400,000 adjusted gross income. Biden has also proposed an increase in capital gains tax for individuals earning at least $1 million annually, Bloomberg reported. This income would be taxed at the regular income tax rate of $39.6%.
“High earners, that is, those earning more than $1 million a year, will be expected to pay taxes up to 39.6% plus investment incomes similar to the rate of wage incomes. This will affect their net earnings but make economic equity more visible,” said Michael Hammelburger, CEO of The Bottom Line Group, spotlighting one of the perceived benefits of the proposed tax plan.
At first glance, the news could appear to be positive for many middle-income Americans. “For now, it appears that middle-class families will be spared a direct tax increase,” Andrew Silverman, a tax analyst from Bloomberg Intelligence, told Bloomberg News.
However, changing the corporate tax rate could adversely affect smaller businesses who, for whatever reason, file using C-corp status. President Trump’s change to a flat tax of 21% for C corporations, rather than retaining graduated corporate tax brackets, adversely affected those with less than approximately $88,000 in taxable income, Harry Daniels, CPA, partner and president of Duggan Joiner and Company in Ocala, Florida, pointed out.
Daniels also offered insight on how corporate tax hikes could affect everyday consumers and middle-class wage earners. “In the operation of a business, there are three quadrants. The profits have to be shared with the government in the form of taxes, with shareholders as a return for their investment in the company and finally, within the company for expansion and growth,” he said. “The one quadrant the company has little to no control over is the government and taxes. Congress generally does not ask us for our input regarding tax policy.”
A hike to 28% for C corporations could lead small business owners and larger corporations alike to cut corners, reduce spending or increase income in other ways. Achieving these goals could take the form of layoffs, postponing hourly wage hikes unless federally mandated and even raising prices on consumers.
“Both large and small businesses may have to decide to forgo compensation in order to be able to keep the shareholders happy,” Daniels said. “A company may have to decide to offset an increase in taxes by reducing dividends to shareholders, which will dilute their income stream.”
In many cases, dividend recipients may be retirees or middle-income wage earners saving for retirement through what they perceived to be savvy investment moves. A reduction in dividend payments could adversely affect anyone relying on investment dividends for residual income.
Additionally, higher taxes could potentially stunt the economic growth the country hopes to achieve during a period of recovery.
“A company may have to decide to offset taxes with a reduction in the expansion and growth quadrant in order to keep the shareholders happy with the dividend stream and a return on their investment,” Daniels said. “A reduction in expansion and growth will eventually impact the economy and the shareholders in the long run.”
Real Estate Ramifications of Higher Tax Rates
Syed Nishat, financial advisor at Wall Street Alliance Group in New York, pointed out that the proposed tax hikes could adversely affect taxpayers living in areas with a higher cost of living and high tax rates, as well.
“We are seeing high earners are moving to lower tax rate states like Texas or Florida to save state tax,” Nishat explained. This can lead to a drain in talent in those areas, which is already occurring as a result of the pandemic and the work-from-home revolution.
As evidenced in Silicon Valley and New York City, top talent leaving higher tax areas of the country hurts local businesses, including those in the service economy such as restaurants. It can also lower property values.
What’s more, middle-income earners in states with a high cost of living could be directly affected by the proposed tax hikes. “Most middle class earn below $400,000, so the current tax hike does not affect them directly,” Nishat told GOBankingRates in an email interview. However, those who live in expensive states like New York or California and are making $500,000 may consider their standard of living as middle income. “The recent tax proposal could affect their overall tax burden,” Nishat said.
The Silver Lining
The good news for many is that some experts don’t believe the proposed tax hikes will pass through Congress — at least not without major modifications. Bloomberg reported that Democrats would need at least 10 Republicans to vote for the bill without calling for budget reconciliation, which was how the American Rescue Plan passed through the Senate. Also, if the new tax bill passes, it’s likely the changes wouldn’t go into effect until 2022, Bloomberg reported.
“The stock market is not expecting the tax hike proposal will pass or that it may pass in a modified version,” Nishat said.
However, American taxpayers aren’t in the clear yet. “Bear in mind that states and cities are cash-strapped due to the pandemic, so expect there’ll be more taxes in the coming months as we head into recovery with the prospect of vaccinating the majority of the population,” Hammelburger said.
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