No Exit
The United States imposes an exit tax when U.S. citizens and certain long-term residents relinquish either their citizenship or their green cards. The exit tax affects expatriates who have a net worth of $2 million, or a 5-year average income tax liability exceeding $168,000 as adjusted for inflation. Expatriating taxpayers are treated as if they had sold all their assets on the date prior to their expatriation. Net gain is the difference between the fair market value and the taxpayer's cost basis in the assets deemed to be sold. Once net gain is calculated, any net gain greater than $600,000 will be taxed as income in that calendar year.
Warren and Sanders had plans to add a second layer of exit taxes. Warren’s tax proposal was a 40% tax on all assets above $50 million for an individual ($100 million for a couple). Sanders’ plan was 40% above $16 million ($32 million for a couple) and 60% above $500 million for an individual and $1 billion for a couple. I think that it is safe to say that should the Democrats control both Houses of Congress and the Presidency, they will make it quite difficult for the wealthy to escape the U.S. tax system, raising taxes so substantially that expatriation will become onerous.
Other Changes
Besides these potential tax changes, what else can the wealthy expect should Biden be elected, and the Democrats gain control of the House and Senate? I suspect there will be stricter enforcement of our laws, especially those that affect the actions and activities of the wealthy.
Regulatory transgressions that might previously have been civil matters or addressed via financial penalties or sanctions, could become criminalized with the alleged wealthy perpetrator’s liberty at stake and the wealthy should not expect to be judged by a jury of their peers. The presumption will be that that the wealthy or their ancestors obtained their wealth unfairly, by subjugating the poor or perpetrating injustices on the marginalized in our society.
These attacks will not be limited to those of one political party or the other. No one will care what causes the targeted individual supported, they will be treated uniformly with the only goal of showing that laws are being administered fairly and consistently. All wealth, no matter how it is accumulated, will be demonized. Any perceived transgression, even if caused by a distant family member or attributable to an organization only tangentially associated with an individual, will be weaponized. Every well-meaning charitable contribution will be highly scrutinized.
Erosion Of Safety
Will government protect the wealthy, or must they fend for themselves? All indications are that the wealthy will need to protect themselves, and I would be investing heavily in personal security related concerns. Most of my clients already have private security but many have substantially expanded and enhanced their protection-related personnel.
Because of COVID-19 and recent civil unrest, many of my clients have left major metropolitan areas or are only going to them when necessary. If they do return more permanently, they will be taking much greater security precautions, though many have already put their city homes on the market for sale or rent. The words we have heard from police chiefs and City officials make clear that they will not put property over people. If the government is not going to protect the property of the wealthy, who will? Under such circumstances, drastic changes in how they conduct their activities, make their investments, and live their lives rapidly become a necessity.
Conclusion
Nothing in this article is intended as a political statement. I am blessed to represent clients who identify as Democrats, Republicans, and Independents. I also believe that no matter who holds political office next year that income tax rates are likely to go up over the next few years to pay down large deficits caused by the legislation in response to the Pandemic.
Instead I concern myself with “realpolitik” or the coercive effect of politics on my clients. I try to identify and assess risks associated with this potential coercion and offer mitigation strategies for my clients so that they minimize the effects of the tsunami of political change allowing them to survive, prosper and live to fight another day.
Michael Kosnitzky is the co-leader of the private wealth practice at New York-based Pillsbury Winthrop Shaw Pittman..