Biden tax proposals may not be enacted any time soon, but family offices are preparing
President Biden on Thursday offered a detailed tax proposal to increase rates on the wealthy and corporations. Experts say the proposals aren't likely to become law due to a divided Congress, but they do set the political agenda for Democrats heading into the 2024 elections and offer indications about the tone and tenor of discussions around taxing the wealthy in the country as a whole.
"Our expectation is low that this will be enacted this year or next year," said Shane Lieberman, a registered lobbyist and executive director of U.S. public policy for UBS. "But we do think there is value in paying attention to its contents as it may be enacted in future years, depending on how the 2024 elections come out."
The proposal from the White House includes increases to the capital gains tax, a minimum tax for the wealthiest 0.01 percent of Americans, and changes to certain loopholes that have benefited wealthy investors.
One thing not included in the policy package is a wealth tax, such as the one proposed by Sen. Elizabeth Warren in her 2020 campaign for the Democratic presidential nomination.
The proposals demonstrate Biden's "putting a policy stake in the ground to try and lead on many tax proposals," Lieberman said. "You'll see Democrats largely accept the proposal" with an eye toward passing a version of it as law if they sweep the elections next year.
Putting the proposal into a historical context, Lieberman described the hoped-for levels of taxation as "the Clinton rates, but with an asterisk" — referring to 1990s-era tax rates, combined with some changes since, such as the current 3.8% tax on investment income that became law with the Affordable Care Act of 2010. The overall discussion around taxes leading into 2024 is expected to include the scheduled 2025 expiration of the 2017 tax cuts.
How will family offices respond?
As to how family offices will adjust to the proposals, Lieberman said, "I don't think you're going to see much change in the next two years, and then beyond that would be theoretical." Any legislation in 2025 would depend on election outcomes next year and the negotiations between the White House and Congress that would follow.
Nonetheless, family offices and ultra-high-net-worth individuals might start having discussions sooner in preparation for possible changes, Lieberman said, citing as a recent reference point the anticipation of passage of Biden's "Build Back Better" efforts in 2021.
"You saw a lot of activity where high-net-worth individuals were talking to estate planning attorneys," he said, "and I think you'll see that again if that scenario is before us, where Democrats win the election, that those high-net-worth individuals will start seeking out counsel and thinking about the path ahead."
As to what kinds of shifts the UHNW world might make if some version of these tax changes does get enacted in a few years, Richard Wilson, president of Family Office Club, said, "If capital gains go that high, family offices will rely even more on 1031 exchanges and opportunity zones."
"These are all going to be top of mind to family offices and their advisers as these proposals wend their way through the legislative process," said Jacqueline Duvall, a partner who advises family offices at the law firm K&L Gates.
The key themes of the proposal for family offices and ultra-high-net-worth individuals are:
- A near-doubling of the capital gains tax, to 39.6%.
- A 1.2-percentage-point bump in Obamacare taxes to 5% for those earning more than $400,000 per year.
- A 25% minimum tax on the wealthiest 0.01% of Americans.
- An elimination of the carried-interest loophole that is commonly used by private equity employees to pay capital gains taxes on a portion of earnings, instead of income tax.
- The loophole in Roth IRA accounts that allows investors to place private investments in accounts at low valuations and see them grow, a tactic that came to prominence via the release of tax records for investor Peter Thiel and Sen. Mitt Romney.
- A change to taxes for real estate sales to end so-called "like-kind exchanges," by which investors can avoid taxes on the sale of real estate by reinvesting profits in the purchase of other real estate
The proposal also calls for an increase in the corporate tax rate, changes for the oil and gas industries, and a change to rules for cryptocurrency loss harvesting to make the field similar to securities.