The Rich Want Biden/Harris While The Rest of Us Need Them
I have discussed before how the stock market tends to do better under Democratic Presidents. We’ve had one term of President Trump and here we are hoping a deal for stimulus can be reached to help out struggling businesses and workers due to a pandemic that surely would be killed by heat if not over by Easter, It turns out whether you want Biden/Harris or need Biden/Harris depends upon if you’re closer to a broker or broke.
Wall Street (and Silicon Valley…and well general) support of the Biden/Harris ticket has changed reversed the state of the presidential race dramatically this year, transforming the Democratic ticket into a record-breaking fundraiser this cycle, despite the money lag Biden had during the primaries. This is antithetical to what we would be led to believe because…
The Biden/Harris Plan Taxes The Wealthy
Writing for MarketWatch, Andrew Keshner explains how former vice president Biden has said he intends to raise corporate tax rates from 21% to 28% and income taxes for those who earn more than $400,000 a year would go up to 39.6%, from 37%. That 39.6% rate would apply to the capital gains of people who earn more than $1 million. It’s one aspect of a tax proposal where the top 1% of earners would pay for almost 80% of an increase in taxes, according to a budget model from the University of Pennsylvania’s Wharton School of Business.
That has not stopped the megadonors from backing them. More than 130 billionaires have already backed the Biden/Harris bid for the presidency according to a Forbes report. That’s more than President Trump’s 99.
While the pandemic has been great for the wealthy, competence and stability for everyone is better for their bottom-line long-term than opportunistic cash grabs during a plague amidst popular unrest. Income inequality is more dramatic than at any time in the past 50 years — and the coronavirus pandemic, it is feared, could further deepen the gulf between the rich and poor. The Biden/Harris tax plan would make sure corporations and wealthy Americans pay their “fair share.”
Now I don’t think it’s unfair that wealthier Americans are availing themselves of tax rules that work to their advantage as they are working within the boundaries given to them. It’s the job of legislators to pass tax laws that discourage or encourage activity the public wants.
Don’t shed any more tears for affluent Americans in a Biden/Harris administration. They’ll be fine as there are four ways they will take the tax-planning bull by the horns weeks ahead of the election. If you are closer to broke than a broker, file this away for prosperity that is hopefully soon to come.
Estate Planning Under Biden/Harris
Americans will inherit $765 billion this year in gifts and bequests, and that sum will generate $16 billion in taxes, according to New York University Law School professor Lily Batchelder, who says that’s barely a 2% effective tax rate.
The Republicans’ tax overhaul of late 2017 elevated the threshold at which the 40% federal gift and estate exemption phases out. Starting in 2018, the exemption level went from $5.45 million to $11.4 million for individuals ($22.8 million for married couples), and it’s indexed for inflation.
The provision ends in 2025, but observers say Biden wants to end it a lot sooner and bring the estate tax back to its “historical norm.”
Biden also wants to end the so-called step-up in basis. This tax rule states that if an heir sells an inherited asset (like 5,000 shares of Google) capital-gains taxation on any future sale is pegged to an asset’s value at the time of inheritance, not the date of the original purchase. If an asset appreciates greatly over time, the step-up in basis saves an heir plenty in capital gains.
What The Rich Are Doing
Estate planners suggest filing estate-tax returns, even when you don’t have to, to get asset valuations on paper — a move that will ease cost-basis determinations later on. Also, instead of speeding up gifts, think about intrafamily loans. A loan doesn’t eat into the gift and estate exemption, and it can always be converted to a “gift” later on, once planners know the legal landscape.
Finally, this year they are converting from traditional IRAs to Roth IRAs. Investors pay tax on IRA distributions once they start tapping the account. With a Roth IRA, they pay taxes during the contribution, and the money comes out tax-free at distribution — so the reasoning for a Roth account is to avoid a higher tax rate in the future.
Capital Gains and Ordinary Income Under Biden/Harris
Unlike Senators Bernie Sanders and Elizabeth Warren, Biden is not proposing a “wealth tax” on the highest earners. But he does want to reset the top income-tax bracket at 39.6%.
He also wants the rich to pay more into Social Security. Employers and employees currently pay a combined 12.4% in payroll taxes on the first $137,700 an employee earns. Biden’s proposal would restart payroll taxation, still at 12.4%, at the 400,001st dollar a person makes.
Biden would raise the capital-gains rate to 39.6% for people making at least $1 million. That would go up from 23.8% (which is the 20% rate, plus the 3.8% net investment income tax).
What The Rich Are Doing
Financial planners are telling their clients expecting bonuses or other special end-of-year compensation to see if they can arrange for the money to arrive by the end of this year and not at the start of next year. Investors with long-term positions and goals are being advised not to contemplate selloffs now unless they have investments that they know they will have to selloff in the next year or so.
The Tax Man Is Coming No Matter Who Wins
Broader tax rules are one way to generate more revenue. Another is making sure taxpayers are paying all their taxes to begin with. Both parties are expected to support increased audits for high net-worth individuals.
The 2020 presidential campaign comes with an increasingly short-staffed Internal Revenue Service auditing fewer returns. The agency data show the IRS audited 1.73 million returns (almost 1% of all returns) in fiscal year 2010. The IRS audited just over 770,000 returns in fiscal 2019, which is fewer than 0.5%.
Figures like former Treasury Secretary Lawrence Summers — a Biden campaign adviser — say the IRS could reap an extra $535 billion if it brought audit rates back to their level of 10 years ago and trained its focus on the super-rich.
This summer, the IRS announced it would be launching hundreds of new audits of high-net-worth individuals. Around the same time, Biden unveiled a plan for universal preschool and higher caregiver pay; the campaign says it’s a $775 billion plan underwritten, in part, by increased “tax compliance for high-income earners.”
What The Rich Are Doing
Tax attornies are stressing the importance access to permanent records related to the costs of capital assets which is something the IRS has become more curious about. Documentation to offshore accounts and cryptocurrency will also be important to have.
These precautionary measures are about protection against uncertainty. The rich never really have to worry for…
The Market Will Win Regardless
From 1929 through 2019, one party controlled both chambers of Congress and the presidency in 45 of those years. The S&P 500 on average rose 7.45% during those years, according to Dow Jones Market Data. The index was up 30 times and down 15 times.
In the other 46 years when there was a split government, the index climbed 7.26% on average, rising 29 times, falling 16 times and remaining unchanged once. In 1968, 1976, 1980 and 1992—all elections that saw a new party win the White House—neither the S&P 500 nor the Dow Jones Industrial Average moved more than 3.2% in either direction.
To be sure, some recent election cycles have been different. After President Trump’s surprise victory in 2016, the S&P 500 rose 6.2% ahead of his inauguration on investor bets for higher infrastructure spending, lower corporate taxes and cuts to regulation.
Bush v. Gore
The day after the election when it was clear neither Mr. Bush nor Mr. Gore had the necessary electoral votes to clinch victory, the S&P 500 fell 1.6%, and the Dow slipped 0.6%. The Nasdaq lost 5.4%. By Dec. 13 when Mr. Gore conceded the race, the S&P 500 had dropped 5%, and the Dow was off 1.7%. The Nasdaq had fallen 17%, and the selling didn’t stop there. In the following years, financial stocks would become the dominant sector in the market.
2008 Financial Crisis
In 2008, the index tumbled 20% from Election Day to Inauguration Day in the wake of the collapse of Lehman Brothers Holdings Inc. during the financial crisis. And in 2000, the S&P 500 dropped 6.3% during the same period following the contested election between Vice President Al Gore and George W. Bush, the former Texas governor who would become president.
Some Uncertainty in 2020
After the 2008 financial crisis, tech stocks regained the baton, and their influence has been growing ever since. The tech sector is set to end 2020 with its greatest-ever share of the stock market, eclipsing its dot-com peak. The Nasdaq has significantly outperformed the other indexes this year, rising 28% compared with the S&P 500’s more modest 6.9% gain and the Dow’s 0.6% loss.
Still, the stock market’s fear gauge, the Cboe Volatility Index, is already nearly as high as it was at the height of the 2000 postelection period, closing Thursday at 28.11. In addition to the uncertainty surrounding the election, investors are also monitoring a rising coronavirus case count and negotiations among lawmakers for another stimulus deal.