Election Day looms. With Nov. 3 quickly approaching, we Americans have much to consider. As we weigh our options before weighing in at the polls, I see one issue coming to the forefront of our nation’s decision-making process: taxes.
Tax policy is a hot-button issue in most presidential elections. Even in the current health pandemic and social unrest, I believe the Trump-Biden contest will ultimately turn toward taxes.
We now have data on just what Democrat Joe Biden’s proposal entails. Let’s compare President Donald Trump’s federal tax rates and Biden’s proposed rates to see how wide the disparities are.
Keep in mind, these figures are for the highest or maximum tax bracket for each of the four categories. What you ultimately pay is your effective tax rate, a blend of the different tax brackets ratcheting higher as income moves higher. Of course, effective tax rates are unique to each person’s individual tax situation, and I thought it would be helpful to look at the new proposed highest brackets where there’s the potential for the most change.
- Corporate Taxes
- Trump: 21.0%
- Biden: 28.0%
- Income and Payroll Taxes
- Trump: 37.0%
- Biden: 52.0%*
- Small-Business Taxes
- Trump: 29.6%
- Biden: 39.6%
- Capital Gains and Dividend Taxes
- Trump: 23.8%
- Biden: 43.4%
From what I can tell, Biden’s proposal would affect a very large swath of the American economy and paychecks — with the largest tax hikes going to high-earning individuals and corporations.
Let’s start with the corporate tax. The taxation of U.S. businesses’ earnings would likely reach the market in its entirety. A hike here would likely impact the vast majority of publicly traded companies’ net earnings and, therefore, your 401(k).
Now for the shocker. Biden’s income and payroll tax rates are perhaps the most nerve-wracking. The Democratic nominee proposes not only to increase the top income tax bracket from 37% to 39.6%, but he also rolls in an additional payroll tax for employees earning over $400,000 with 6.2% paid by the employee and 6.2% paid by the employer. *The 12.4% icing on his tax-grab cake is for Americans business owners who earn a salary of over $400,000 annually and would need to pay both sides of this new tax. Ultimately, this is a lose-lose scenario for high-earning business owners as they’d hit the bracket of 52% tax with income and payroll combined.
Keep in mind, none of this includes state income taxes.
Small businesses — meaning those with 500 or fewer employees — are the backbone of American industry. These companies account for over 99% of the total number of all U.S. businesses. They produce jobs for nearly 50% of our workforce and close to 45% of our nation’s GDP. In 2019, they created over 60% of new jobs in our country or 1.5 million jobs per annum.
Biden’s small-business tax increase comes via reducing or eliminating existing tax deductions for these companies. Putting these businesses in a financial stranglehold would stifle these massive job creators.
Now for capital gains and dividend taxes. The current rate of 23.8% comes from a maximum capital gains rate of 20% and a 3.8% net investment income tax for families who earn over $250,000 annually. Under Biden’s proposal, the maximum 20% rate would be replaced by a mirror of the 39.6% threshold bracket for marginal income taxes. Put plainly, current capital gains tax rates would morph into the ordinary income rate. The 43.4% figure from our breakdown above comes from the addition of the 3.8% investment tax.
From where I stand, you would have to be pretty far left on the political spectrum to back these tax hikes. Perhaps supporters believe higher taxes mean more government control and an attendant increase in the quality of life in America.
I beg to differ. Think of where we are. We’re in an economic healing phase. Do we really want to bring down the hammer of higher taxes when we’re struggling to get our economy back up and running?
If there is a good argument for raising taxes, the only one I can think of is that it could help carve us out of the tremendous debt and deficit that the U.S. continues to build. But even this idea doesn’t pass the litmus test. Resolving the deficit problem will take robust economic growth and more growth, plus caps on spending. Tax hikes stand only to smother this rebound.
I want to outline what I feel are the most critical tax conversations in the U.S. right now, all of which will continue to garner greater attention in the election run-up.
- An Executive Order for Payroll Tax Cuts
Trump signed a new executive order that will curtail payroll taxes for the remainder of the year. The cut could add between $1,000 and $2,500 to working Americans’ bank accounts who earn $104,000 or less annually.
We’ve outlined his proposal above. But what would the changes actually cost American taxpayers? An estimated $3.5 trillion over the next 10 years. That’s trillion with a “t.”
- Capital Gains Tax Reduction Considerations
Trump, a Republican, has hinted at reducing the capital gains tax on his own (currently capped at 20%). He can’t unilaterally reduce the rate, but he can enlist the help of the Department of the Treasury by directing how these taxes are calculated by indexing gains to account for inflation. If successful, this move could net out savings on a variety of taxable events for Americans.
With lower taxes on capital gains comes greater flexibility when you need to tap appreciated assets, such as stocks, real estate and private business interests. Plus, lower taxes, as a general rule, raise the value of assets like these. Selling is much more appealing when the tax ramifications are less punitive. Over the long haul, tax cuts to capital gains encourage the creation of new businesses, put more money in consumers’ pocketbooks, and bolster the purchasing power of investments.
In 2009, amid the Great Recession, President Barack Obama said, “The last thing you want to do is raise taxes in the middle of a recession.” It seems that Biden has forgotten the words of the man he served in office for eight years.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than 10 years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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