There are two new tax proposals being floated. One is an income tax proposal and the other is a wealth tax proposal.
Income Tax
Representative Alexandria Ocasio-Cortez (D-NY), one of the new class of legislators in the House of Representatives has suggested the rate of income taxation for high-earners be raised. She is suggesting a top rate for those making over $10 million per year be increased to 60% or 70%. She’s suggesting the proceeds could be used for a “Green New Deal” or other programs. Here’s a link to more information. To be clear, she’s not suggesting that those making $10 million in income should have all their income taxed at the new rate. She’s suggesting that the marginal rate for the amount of income over $10 million should be 60% or 70%. The top marginal rate has been as high as 94% and didn’t drop below 70% until 1981.
Wealth Tax
Senator Elizabeth Warren (D-MA), who is running for the Democratic nomination for President, has proposed a new tax. This new tax would be a wealth tax, not an income tax. This new type of tax would be tied to an individual’s net worth. In that way, it’s more akin to a property tax than to an income tax. It would levy an annual tax of 2% on household net worth above $50 million and a tax of 3% on net worth above $1 billion. Sen. Warren can see the obvious incentive for the ultra-rich to avoid such a tax. So, along with her proposed tax, she’s proposing annual audits for mega-wealthy individuals. In addition, she’s proposing a tax on those who would renounce their American citizenship to avoid the net worth tax. The expatriation tax would be 40% of the amount of their net worth exceeding $50 million. Here’s a first article outlining the proposal by Sen. Warren and here’s another explaining why it might work. The new tax is alleged to fight the growing economic disparity in the country. Perhaps surprisingly, in recent polls, the American public supported the idea by more than two to one. While support was stronger among Democrats, even a plurality of Republicans supported the idea. Here’s a link to more information about the polls and the proposal.
It’s unlikely that either of these proposals will go anywhere until 2020, due to the current political environment in Washington. But, depending upon the outcome of the 2020 elections, one or both of these proposals could gain traction. If you face applicability of one or both of these taxes, one may want to consider strategies to reduce income or net worth. For example, one could give assets to relatives or nongrantor trusts to spread the net worth and income. In an extreme case, one could even consider expatriation. But, beware as there is an expatriation tax, even now.
These tax proposals are merely that at this point, proposals. We don’t even know their specifics. It’s difficult to plan to avoid a tax when you don’t know when or how it might or might not apply. It’s definitely too soon to panic. But, it’s not too soon to keep these proposals on your radar.
If you have questions about estate planning, contact us at (913) 262-2000 so you can meet with one of the experienced attorneys at Gaughan & Connealy.
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