Barry Ritholtz’s piece this week on the new proposed tax structure is worth your time and attention. I’ve never actually met Barry in real life, but I’ve been deeply and positively influenced by his writing over the years and our views on these things are quite similar.
Our biggest difference of opinion is that he tends to favor V8 engines (and bigger) while I am strictly electric from here on out. Who knows? Maybe he’ll come to his senses someday.
The key to the politics is understanding these policies go after the ultra-wealthy where they live. It goes after the benefits that even the affluent (those making $200-500k/year) never even consider: things like stepped-up basis and the carried interest loophole. The politics of the right wing, who oppose any tax ever, is to get that base riled up enough that they rally to the defense of the Hamptons and Aspen crowd. Good luck. In any case, we’re too early in the game to see what from the new tax bill will survive a 50/50 Senate and which will be voted off the island. Since the prediction game is fun, here are my attempts to handicap this race and pick a few winners and losers.
Place Your Bets
These are ranked in order of my confidence that they will happen.
1. Top marginal rate on earned income goes back to 39.6%. This is not a hard sell moving from 37%.
2. Top capital gains rate goes to 25%. See Barry’s piece and why this makes sense to him and to me. If the final number isn’t 25% it’s much closer to that than the proposed 43.4% rate.
3. We are not going to tax unrealized gains at death and then subject the remainder to a 40% estate tax unless the exemption gets increased substantially. This is the move to end financial aristocracies like the Walton family but it’s not good politics. It also gives the president something to give up.
4. Carried interest loophole gets squashed like a bug. At a 40% rate this is irrelevant but at 25% it should be front and center. Anything that made Mitt Romney worth $500 million deserves to go.
5. Real estate preferences get squashed. Ask your favorite real estate developer about Section 1031 exchanges and stepped-up basis and their eyes light up like a seven-year-old on Christmas morning. Create some small-level safe harbor at around $5 million or less and these go away.
6. The state and local tax deduction is not coming back. We’ve ripped that band-aid off and the pain and complaining is subsiding. We don’t need to revisit it.
Making the Sale
The politics of this are tough. A 50/50 Senate is usually not a recipe for major policy changes in politically sensitive areas like taxes. However, the president is wildly popular at the moment and enjoying the spoils of a vaccine rollout that has gotten the economy moving again.
If members of Congress are able to satisfy all of their constituents who will never be affected by any of these changes, this program likely becomes the law as soon as next year. If there has been a moment to reverse the tax climate in Washington that settled over it 40 years ago, this is likely it.
Capital Gains & Multimillionaires
Barry Ritholtz’s piece this week on the new proposed tax structure is worth...