Here Comes Tax Hikes; Trial Balloons Floated

THE SUGAR HIGH OF HANDING OUT FREE MONEY will be replaced soon by the realization that higher taxes are on the table. Dessert first, then the broccoli.

IT’S VIRTUALLY CERTAIN that the Biden Administration will propose tax hikes later this spring. So the debate will be over the details, which have started to leak out — part of an age-old Washington tradition of floating trial balloons to see what will fly.

THE GOOD NEWS is that radical ideas like a “wealth tax” have no chance in the 50-50 Senate. A Wall Street transaction tax also faces an uphill fight.

BUT PRESIDENT BIDEN PROMISED to raise several taxes, and there’s no reason to believe he will relent. These tax hikes probably won’t derail a roaring economy this summer, but the fate of specific provisions like capital gains rates will be a source of market uncertainty for the next few months.

THE BIDEN ADMINISTRATION didn’t attempt to pay for the just-enacted Covid bill, but there will be an effort to pay for at least part of this fall’s green infrastructure package. Thus it’s certain that the new plan will propose hikes in top corporate and individual taxes. The question is how much the narrowly divided Congress will approve.

WE ANTICIPATE THAT EVERY REPUBLICAN will vote against tax hikes, even though polls show the public favors raising rates on “the rich.” A handful of moderate Democrats also may waver on higher taxes, which will keep the final price tag around $1 trillion — not the $2 trillion-plus that progressives favor.

HERE’S OUR VERY EARLY HANDICAPPING OF KEY PROVISIONS:
* The top individual rate is likely to rise from the present 37% now, perhaps not back to 39.6% but something close to that for those who earn over $400,000 per year. Polls show strong public support for higher taxes on “the rich.”
* The top corporate tax rate will rise from 21% now to 25% or 26% — not the 28% that Biden may seek. A new corporate minimum tax, especially for multinational firms, may be part of the equation.
* The capital gains rate could rise by several points from the 20% maximum now, but not to a level equal to the top individual rate.
* Estate taxes could rise a bit higher than the top rate of 40% now, and the “step up basis” on calculating assets could be toughened.

EFFECTIVE DATE UNCLEAR: The impact of these hikes would clearly be felt in 2022, an election year, which could keep the tax bite modest. The effective date could be as early as mid-year 2021, when the bill probably will be introduced in the House Ways and Means Committee, or it could be as late as Jan. 1, 2022.

THE LATTER OPTION could lead to massive selling of profitable assets as this year ends, as investors take advantage of lower capital gains rates before a new rate takes effect on Jan. 1.

BOTTOM LINE: The economy can withstand somewhat higher taxes, and any sign of seriousness on curbing the budget deficit might be welcome. But Republicans suddenly see an opening — a surge of illegal immigration and the threat of higher taxes — two issues that may keep Democrats on the defensive as uncertainty grows.