President Biden’s tax increase proposals will probably change significantly before they come up fot a vote, according to two senior executives with Brown Brothers Harriman, a financial services firm and private investment bank based in New York City.
“The law is not going to be enacted as it is now proposed. Congress and the president are just at the starting point of negotiations,” said Alison Hutchinson, Brown Brothers Harriman managing director and senior wealth planner.
Whatever is enacted will not have a profound affect on the markets, added G. Scott Clemons, Brown Brothers Harriman partner and chief investment strategist.
“What we have on the table now is a long way from what will become tax policy,” Clemons said. “We are in the early stages of crafting a new tax policy. Bills will fly back and forth between the houses of Congress. I can find no correlation between tax changes and the market, which makes sense because tax changes are only part of what affects the market.”
The two discussed potential tax changes and their affect on advisors and investors at a recent Brown Brothers Harriman webinar, “The Taxman Cometh: The Biden Administration's Tax Proposals and What They Mean for You.”
The recent $5.2 trillion in federal spending has left the United States far from a balanced budget, they said. “Tax increases alone will not address the problem,” Clemons said. “Economic growth is going to be needed to deal with it.”
Income taxes will go up for higher-net-worth families; corporate income taxes will go up; Medicare taxes are likely to increase; and the IRS will be given more tools for enforcement, Hutchinson said.
“The top 1% of earners supposedly failed to report 20% of their income and failed to pay $175 billion in taxes,” she said. “But I am not sure increased enforcement is going to raise the amount the government hopes.”
However, there will be more audits. The wealthy and business owners should keep meticulous records in order to be prepared, she added. Tax reform can be written so that small family businesses and family farms will not be hurt. but it is not known yet how those entities will be defined.
“The uncertainties alone are disconcerting,” Clemons said. “I’m not even sure President Biden’s proposals have enough support in the House to pass” let alone the Senate. Because the Senate is evenly divided, “each and every senator has veto power” over the tax proposals.
The place where the proposed changes have implications for wealthy clients is in the area of planning, the two executives said. If a client is thinking of selling soon, he or she may want to do it this year rather than wait and risk a higher tax, Hutchinson said. “The chances of any taxes being made retroactive are unlikely..It would be bad for public policy,” she said.
If a business or other assets are sold, “you will want to hire an evaluations firm to check the value of the business or asset, because it will be checked” by the IRS, she added.
One good thing that is coming out of the tax debate is that it is prompting advisors and their clients to have serious discussions about wealth and what the money is for, she said.
The proposed increases have not brought a lot of protest because they “fall on the shoulders of a narrow subset of investors,” Clemons said. “I think that also explains the lack of market reaction” to the proposals.