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Biden’s Looks to Hike Taxes for the Rich

Biden to tax the rich

  • Buoyed by his success in passing his US$1.9 trillion fiscal stimulus package, U.S. President Joe Biden is looking to hike taxes, particularly capital gains taxes
  • Slim chance that tax hikes might get passed and increased capital gains taxes as well as corporate taxes could hurt investor sentiment, punishing low margin firms and rewarding companies which have more options when determining where their revenues originate

It’s as yet unclear whether or not U.S. President Joe Biden is any good with a bow and an arrow, but there’s no doubting that he’s looking to make history by eyeing one the biggest tax hikes in almost three decades and taking from the rich to give to the poor, well, sort of at least.

Buoyed by his success in passing his US$1.9 trillion fiscal stimulus package with few compromises, Biden is now eyeing the first major tax hike since 1993 that will help fund some of his long-standing economic and infrastructure plans.

The Biden administration is drawing up its plan at a time when at least half a dozen states are also considering raising taxes for the wealthy in response to the economic fallout from the coronavirus pandemic.

And the proposed policies collectively could shape the way millions of Americans save, spend and manage their finances for years.

An independent analysis of those proposals by the Tax Foundation estimated that the top 1% of taxpayers would see their after-tax income reduced by around 11.3% in 2021 and the top 5% would see it shrink by 1.3%. Those in the 90th to 95th percentile would see their after-tax incomes reduced by 0.2%.

While Biden has rejected a wealth tax, as proposed by progressive Democratic Senator Elizabeth Warren, he has called for expanding the estate tax’s reach, as well as taxing capital gains and dividends at the ordinary income tax rate of 39.6% for those making more than US$1 million.

These capital gains taxes if implemented, could have serious implications on currently frothy asset markets and may force investors to reassess their asset allocation strategies, including what they invest in and how.

Income tax rates would edge up to 39.6% from 37% for those making above US$400,000, who would also face a 12.4% Social Security payroll tax.

While middle class families will be spared a direct tax raise, Biden’s plan to raise the corporate tax rate from 21% to 28% might still affect middle and lower-income individuals.

Higher corporate taxes could eat into earnings, reducing the amount that companies can spend on pensions and employee stock plans and encourage firms to offshore more of their incoming revenues, keeping them just beyond the reach of the United States.

The tax proposal is also an opportunity to fund Biden’s plan to increase U.S. employment, which includes US$400 billion for manufacturing and US$300 billion for research and development.

Tax earnings could also boost infrastructure, combat climate change, expand help for the poor, and address the inequities in the tax system.

And that should help companies like Intel, which still has substantial manufacturing resources in the U.S., as well as solar companies and even electric vehicle makers.

To be sure, any tax changes will have to move through Congress, and Biden has almost no power to push through his plan via an executive order.

Even though they hold a slight majority in the Senate, Democrats would need at least ten Republicans to back the bill to move it under regular Senate rules. But Republicans are signalling they are prepared to fight, with Senate Minority Leader Mitch McConnell saying last month the two parties will “have a big robust discussion about the appropriateness of a big tax increase.”

Odds are low that the proposed tax hikes will make it through, but then again, the same was said of Biden’s US$1.9 trillion fiscal stimulus.

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