Judd Matsunaga
As an economics major at UCLA, I learned that Democrats support a Keynesian economic theory, which says that the government should spend its way out of a recession. Therefore, Democrats gear their economic policies to benefit low-income and middle-income families. They argue that reducing income inequality is the best way to foster economic growth.
Low-income families are more likely to spend any extra money on necessities instead of saving or investing it. That directly increases demand and spurs economic growth. One dollar spent on increased food stamp benefits generates $1.73 in economic output (source: Moody’s Economy.com).
On the other hand, Republicans promote supply-side economics. That theory says reducing costs for business, trade and investment is the best way to increase growth. Investors buy more companies or stocks. Banks increase business lending. Owners invest in their operations and hire workers. These workers spend their wages, driving both demand and economic growth.
Republicans advocate that taxes on businesses and the wealthy in society should be reduced, allowing them to hire more workers, in turn increasing demand and growth. These policies should enable wealthy owners to create more jobs for middle- and lower-class citizens, meaning the benefits are felt by everyone, e.g., benefits will “trickle down” to Joe the Plumber.
Which is better? I don’t know, especially since the pandemic has shut down many businesses all over the country. What I do know is that typically, in the wake of a presidential election, the question is not if there will be tax reform, but when and to what degree. Historically, new administrations, regardless of party affiliation, propose tax policy changes for Congress to enact.
President Joe Biden is no exception. The House Ways and Means Committee recently released its proposed “2021 Tax Reform” legislation. Democrats will be trying to push a $3.5 trillion bill through Congress. The Democrats have an agenda to invest in education, green energy, health care and social services for the elderly and poor and expand childcare services.
President Biden has recently announced the donation of 500 million Pfizer vaccine doses to lower-income countries. According to the Washington Post, Pfizer is selling the doses to the U.S. at a “not-for-profit” price, though the price was not specified. (Although I found the cost on France24com, $3.5 billion.)
To pay for a historic and sweeping expansion of the social safety net, Biden and Democrats are planning to slap wealthy Americans with higher taxes. Biden’s tax plan would take from the rich and give to the poor. Federal income taxes would rise significantly for high-income households, while middle- and lower-income households would see taxes decrease, according to a new analysis by the Tax Policy Center.
The good news is that the tax code changes sought by Democrats in the House of Representatives would actually reduce annual tax bills for Americans earning less than $200,000 a year through 2025. Those earning over $200,000 would rise slightly in 2023, escalating to a 10.6 percent increase for people earning $1 million and more (source: Reuters.com, Sept. 14, 2021).
However, as Democrats get closer to raising taxes, higher net-worth individuals are taking steps now to avoid some of those steeper levies later.
To avoid clients being hit at a higher marginal income tax rate next year, Mallon FitzPatrick, managing director and principal at Robertson Stephens in San Francisco, is advising high net-worth families to consider gifting an income-producing asset like real estate to a family member who falls in a lower bracket. The gift giver reduces taxable income, and the receiver pays a lower tax rate on the income from the asset.
Another way to report a lower taxable income next year would be to delay some of your charitable giving — and the deductions they earn you — until 2022. “Charitable income tax deductions are more valuable in a higher income tax rate environment,” he added.
Although Biden originally called for raising the capital gains rate to 39.6 percent, advisers say many clients are breathing a sigh of relief at the latest proposals — capital gains rate, which applies to assets like stocks and real estate, to 25 percent from 20 percent.
Although, wealthier individuals are limited in how much they can prepare for what will likely be a higher capital gains rate in the future because policy makers have proposed making the hike retroactive to Sept. 13 of this year.
Still, many are dreading a higher tax bill. Lawmakers are also proposing reducing the estate and lifetime gift exclusion to around $6 million from the current $11.7 million, meaning more people will be hit by the estate tax of up to 40 percent. Before the estate tax ensnares more people, plan to gift exemption amounts before the end of 2021.
There are a number of ways this can be done, FitzPatrick said. “You can give the gift outright, which means you surrender control of the assets to the receiver. The other option is to use an irrevocable trust. With some trusts, you also give up power over the assets — and therefore the estate tax liability — but you may still be able to set some controls on how the funds are distributed.”
In conclusion, if you’re a taxpayer who is wealthy enough to do so, you should consider gifting whatever you have left of that exemption before the effective date of the new tax. This requires identifying what assets you would gift, who you would gift them to and whether it makes sense to set up trusts for those recipients until they reach age 25. It would be a good idea to consult your tax attorney or CPA as soon as possible.
Judd Matsunaga is the founding attorney of Elder Law Services of California, a law firm that specializes in Medi-Cal Planning, Estate Planning and Probate. He can be contacted at (310) 348-2995 or judd@elderlawcalifornia.com. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen or constitute legal or tax advice and should not be treated as such.
