Media, Politics, and Taxation
By David J. Haas CFP®
November 16, 2020
The election is over, although the hand-ringing, jockeying, and bad behavior seems to be continuing. I haven’t written a blog in a while, but its definitely time and I hope you indulge me as I muse on a few subjects we have all been thinking about recently, even if we try to push them to the background. I will conclude by discussing what it all might mean for your income taxes going forward. Skip to that part if you aren’t interested in yet another opinion on the election.
Let me preface this discussion by admitting I’m a bit of a media junkie. In college, I was both on the staff of the Poly, our weekly newspaper and News Director for WRPI, the FM radio station. I still read the newspaper every day and read still more news online. I do not subscribe to the “fake news” meme which is so prevalent, but that does not mean I am letting the media off-the-hook here. In fact, I think the media is stepping over-the-line every day.
The problem is conjecture or “what-if”. The news outlets spend far too much time trying to forecast what will happen “if” something else happens. That something else might only have a very small chance of happening, but it riles everyone up, drives stock markets up or down, and even affects everyday business transactions. What if you can’t buy toilet paper during the lockdown? Then suddenly we get a run on toilet-paper. What if President Trump refuses to concede the election? What if there was election fraud? Even the conjecture in the news media causes people to believe these things as facts. They are only conjecture.
Remember what the product is for news. Its your eyeballs. They want you to consume their articles so they can sell you things they advertise or just so the authors can sell more articles. There is an incentive for wild speculation which is designed to inflame your passions, no matter what your view is.
Politics and Markets
Let’s talk about politics now. And let’s talk about the markets (or investments and the economy). There is an assumption that one party is pro-business and the other party is anti-business. There is also an assumption that Wall Street likes one party far better than the other. These assumptions are completely false. Both parties have done things which are pro-business in the past and both have done things which are anti-business. The economy has thrived under both Democratic and Republican administrations. The stock market has gone up (and down) under both administrations. Sometimes what appears to be good for business in the short term (tax cuts) can be bad for the economy in the long run (high budget deficits and national debt).
The economy and Wall Street like stability and predictability, not political parties. President-Elect Biden has won the election. The stock market has been rallying. No, I actually don’t think there is a correlation. It all happened at the same time that we got some excellent news about Pfizer’s vaccine having a 90% effective rate on COVID-19. That’s the reason for the market rally, not politics. An effective vaccine means stability, recovery, and growth in the future. That drives the stock market, not who’s in charge. We give politicians far too much credit and they take far too much credit. It’s funny that they always try to get out of taking the blame. They don’t deserve either one most of the time.
There is one way politics can drive the markets. If a political standoff in Washington causes a delay in funding the government or raising the debt limit or even stalling needed stimulus or aid, this may cause market instability. Markets hate uncertainty and instability so this is something to watch for in the coming months.
The US government’s powers to tax its citizens (and green-card holders) is one of its most important powers. The government often tries to implement economic and social policies by using the tax code and that’s why our tax code is so very complex. Joe Biden promised to raise income taxes on the wealthy and Donald Trump promised to make the 2017 tax cut permanent instead of allowing it to expire at the end of 2025. We’ve had the election and Joe Biden won? Does that mean taxes are going up January 21st?
Joe Biden has proposed the following as part of his platform (taken from Tax Foundation website):
- Imposes the Social Security (FICA) payroll tax on earned income above $400,000. Currently any income above $137,700 (adjusted for inflation) is not taxed for Social Security. This raises taxes on individuals (not families) who earn more than $400,000 in wage income to shore up Social Security.
- Changes the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law back to 39.6 percent.
- Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million.
- Eliminates the step-up in basis upon death for capital gains.
- Caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.
- Restores the Pease limitation on itemized deductions for taxable incomes above $400,000.
- Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
- Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.
- Expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.
- For 2021 and as long as economic conditions require, increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.
- Reestablishes the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.
- Expands the estate and gift tax by restoring the rate and exemption to 2009 levels.
Biden’s plan also includes changes to business taxes including raising the corporate tax rate from 21 percent to 28 percent and creating a minimum tax for those corporations which book profits of more than $100 million. Interestingly enough, repeal of the limitations on state and local (SALT) deductions is not officially part of Biden’s platform, although he has stated he wants to repeal them.
Likely Changes With Split Government
We are going to have a split government next year. Democrats have a very narrow majority in the House. Republicans have probably maintained control of the Senate, although a run-off election for the two Georgia Senate seats in early January will determine that. Even if the Democrats win those seats, their majority will be very narrow and Democrats are probably not going to be united when it comes to tax policy. The difference between the progressive and conservative wings of the party are great. They united to defeat Donald Trump, but once in power, unity will be difficult.
So does that mean tax changes are unlikely? It all depends on the centrist politicians in both parties. When politics works properly, the two parties compromise on legislation where each of them get something they want. Republicans are looking for things that Democrats can agree to allow (even if the progressives vote no) and Democrats want to accomplish some things that centrist Republicans may work with them on for the good of the country. Republicans will suddenly remember they are fiscal conservatives and assuming tax increases can be disguised, they are certainly possible.
I expect some increases in taxes next year. I would certainly expect they will be for the very wealthy. It really depends on President Biden’s leadership. He is a seasoned politician and if anyone has a chance of getting things done in Washington, its him. I think its unlikely we will lose the step-up in basis for capital gains, but any tax breaks will be for the middle class. Its not clear to me what part of this tax wish-list Biden will start with, but I’m guessing it will be late in 2021 before any of it moves forward. Washington will be consumed with the pandemic in the first half of the year. For this reason, I do not recommend making any changes or taking any action at this time because of Biden’s tax proposals. I think taxes will go up, but not immanently. It remains to be seen exactly how.
Relax and Stay Safe
So if you are upset that the Democrats didn’t do better, just console yourself with the fact that Democrats keep control of the House and regain the presidency. Donald Trump has been removed. If you are upset that Donald Trump lost the election, console yourself that Republicans actually did quite well in Congress, likely maintained control of the Senate, and Donald Trump is unlikely to go meekly into the night. While we wait for more clarity, the important thing is for you and your family to stay safe. Wear a mask, social distance, and stay sane.
Cereus Financial Advisors Announcements
One big announcement from Cereus Financial Advisors is the start of our College Financial Planning Service called College Money Match. We are helping families of high school students plan for one of the largest expenditures in their lives. We are helping them choose colleges which maximize aid, create a budget for all 4 years, and make smart choice when it comes to loans. Details at www.collegemoneymatch.com.