Predictions For 2021 – Part 2
As a result of the Georgia Senate elections on January 5th, we have regime change. The Democratic Party now controls the White House and both chambers on Capitol Hill. They are free to enact almost any economic, regulatory or fiscal legislation they desire as long as they can agree amongst themselves and pass muster with the Supreme Court. None of what they do will be undone until the Republican Party regains control of all three legs of the stool. In the past 40 years one party has had complete control in only 14 of them, so it could be a while until that happens. Here is what I think we will see from the Federal Government in the coming year from a fiscal and economic perspective.
For the first few months, they will be tied up trying to implement their own Covid plan. We can expect more stimulus money being distributed to almost everyone, unemployment payments being expanded and extended and more aid of some sort being directed at small businesses. This plethora of money chasing fewer goods and services will lead to increased inflation, that’s Econ 101. Sustained inflation will lead to higher market interest rates – the Fed will not be able to stop this over any extended period.
They are also likely to extend eviction and foreclosure moratoriums, pushing that snowballing issue down the road. In addition, they are likely to be distracted for some months going after the previous administration and their supporters for any transgressions they think will stick.
Once this initial fog clears, I see the following taking place:
Taxes will go up. The question is which taxes, how much, to whom, and when. The delay in getting to this likely means we will be well into the year when this gets enacted. Therefore, it is increasingly likely that most changes will take effect next January 1st. Implementing a mid year change, retroactive or not, creates complexity, especially for individuals.
We have seen the proposals as to which taxes may be increased. Income Taxes, Corporate Taxes, Estate Taxes, Social Security Taxes are all in play, as per the Democratic Platform. It is likely we will see increases in all of them. The question is how much and who will be subject. The Democrats have a razor thin majority. In the Senate they can not lose a single vote. The Democratic platform proposed relatively modest increases, mostly directed to only those who were in or near the “1% group”. However, there is a much larger contingent in their caucus that sees “wealthy” at levels far below the platform proposals. It is unlikely that the increases will be imposed only on the Ultra High Income and Net Worth group. I will guess that if your income (adjusted gross) is above $125,000 (single filer) or $225,000 (joint filer), you can expect to see some increases. That level falls around the top 10% of earners, still quite wealthy to the “progressive contingent” and their supporters.
In addition to tax rate increases, individuals can expect caps, reductions and eliminations in deductions and other preferences. Limits on pension contributions or the ability to convert an IRA to a Roth are examples of things we may see. Increases in actual taxes paid will likely be far more than the percentage increase in rates. There is a likelihood of the elimination of capital gain and dividend tax preferences. Owners of small businesses which are pass through entities (S Corp., LLC, etc.) will see their QBI deductions reduced, further curtailed, or eliminated. C Corporations are looking at tax rate increases. Social Security taxes for individuals and businesses are going up. The rate may not increase for a while, but the wage base will be increased.
Gift and Estate taxes are going to increase markedly. The Democratic Platform proposed a rate increase and cutting the current lifetime exemption of $11.7 million per individual (or 23.4 million for a married couple) in half. In addition, there has been chatter of eliminating the step up in basis upon death. Some have even proposed deemed sale on death which would be coupled with the elimination capital gains preferences. I predict that the floor of the lifetime exemption heads closer to $1 million per person to placate the progressive wing – after all someone dying with even that much money is wealthy to their supporters. If all of this happens, when added to state death taxes, the total estate tax bill could approach 80-100% for some unlucky decedents.
From an investment perspective the government will be more directly and indirectly involved in picking winners and losers. Tax rate increases will be somewhat universally applied but, preferences will be doled out in huge doses. Many businesses will face increased regulations, a higher minimum wage, and other interference in the ESG sphere. Government spending on their new priorities will create new winners.
I realize that much of this is broad and not easy to digest. If you have questions about any of this, or want to know how it might affect you or your business, please don’t hesitate to reach out. There may still be some time to do some planning and mitigate or take advantage of the new paradigm we face from regime change.
The Bottom Line: Act now, while you still can.
–Michael Ross, CFP®