President Joe Biden may soon find out that the billionaire tax hike is more complicated than it seems.
The new president wants the rich to pay much more taxes to fund a $ 1.8 trillion plan that invests in things like childcare, education, and tax cuts for the poor to reduce inequality.
But on the other corner of the ring stands a sophisticated wealth management and accounting industry ready to fight, temper any aggressive proposal and exploit every loophole to please their clients who pay them big bucks to defend every dollar.
In the next few months – and in the next few years, if Biden's plan works in any way – these forces will collide. Adopting the tax assessment is only the first step. Execution could be more difficult. Regardless of the Democrats' intentions, they may find that their plan is leaving tech billionaires off the hook.
And so the wealth management industry is teeming with confident optimism about outsmarting the bureaucracy.
“The rich will find ways to get around this. There are too many ways to postpone, minimize or even avoid taxes. "
“The rich will find ways,” predicted an asset manager. "There are too many ways – perfectly acceptable ways – to postpone, minimize or even avoid taxes."
What wealth managers and pro-tax activists share is the belief that the Biden proposal poses a greater threat to millionaires than it does to billionaires – because billionaires can often be more patient with taxes and when they want it pay. Millionaires have to work harder to find clever workarounds.
The Biden plan would raise the federal rate to nearly 40 percent for individuals who earn over $ 450,000 a year. It would raise the ultra-rich's capital gains tax rate – the rate high net worth entrepreneurs pay when selling a company or high net worth investors when selling a share – to over 40 percent. The White House would end the so-called "angel of death" loophole that enables the rich to effectively circumvent capital gains tax by not setting the tax when assets are passed on to an heir. Most importantly, Biden plans to increase the IRS's enforcement powers, a move the government believes could generate more than a third of the $ 1.8 trillion in revenue targeted by the tax reform.
And it's true that these proposals have at least some of the ultra-rich crying out on the brakes, more than half a dozen asset managers and accountants of some of Silicon Valley's richest families to Recode.
In the past few weeks, more than a few wealthy executives and investors – including those who made their fortunes in the tech industry – have fired emails and marched in panic to meetings with their money managers. Do they really have to pay capital gains tax, which could mean more than half of their annual income goes to either the federal government or the California government? Would their children really not have access to the intergenerational wealth that the family's patriarchs and matriarchs worked so hard for?
Yes, there are "mini freakouts in every client conversation we have," said a wealth manager for the Silicon Valley wealthy.
To prepare for a world where Biden's plans could become a reality, wealthy people across the Bay Area are rushing to get their teams to prepare legal documents to prepare for the possible existence of Biden's plan. A source said that tax attorneys he works with have already announced they won't be accepting clients after September because they expect so much last-minute business in 2021. Another said he noticed more and more customers talking about moving to tax-friendly Puerto Rico after the Biden proposal.
But there are a number of reasons why tax professionals are not as concerned as their clients. And not just because activists and asset managers expect the Biden plan to be significantly watered down when it finally passes Congress.
It is obvious that the increase in the top tax bracket does not matter because the 0.01 percent do not make their fortune from a salary; they do it by creating or investing in businesses. It is evident that the increase in the rate of capital gains can be bypassed if the rich avoid "realizing" the gain when that higher rate is in effect. And then there's the even less obvious – that mega-billionaires can quite successfully go to great lengths to avoid paying a capital gains tax by using loans, charitable donations, and a Byzantine escrow system to keep their fortunes away from Uncle Sam protect.
For Gabriel Zucman, an influential progressive economist who studies billionaire tax payments, the Biden plan has a "serious limitation".
"When you're Jeff Bezos or Elon Musk or the tech billionaires, it's very easy to hold (your) shares while borrowing money to buy things – homes, private jets, or any kind of consumption," Zucman said . “The other thing in the Biden Plan is taxing capital gains on death. But obviously most of these tech billionaires are still quite young, which means they could pay very little taxes as a fraction of their wealth for many years and maybe even decades. "
Essentially, in a year when Biden's capital gain increase goes into effect, the tech titans will be resisting selling stocks (not that active executives are initially selling a lot for fear of scaring the stock market). Even if Biden succeeds in his plan to remove the provision that would allow billionaires to avoid paying capital gains taxes by bequeathing the wealth to an heir – a privilege known as a "step-up" or base called the Angel of Death loophole mentioned above – The ultra-rich in Silicon Valley may have to pay more, but not for decades when they die.
The irony is that Zucman, the academic head behind Liberals' demands for a property tax, broadly agrees with the property defense industry on one important point: that the ultra-rich will be able to successfully fend off some of the Biden Plan's most intrusive proposals, what possibly undoing the government's plan to collect hundreds of billions in tax revenue. The difference to Zucman is that Biden has to get even braver. For money managers, maybe Biden shouldn't even try.
"No matter where customers are in the political spectrum, none of them look forward to paying more taxes"
"No matter where the clients are in the political spectrum, none of them look forward to paying more taxes," said one asset manager. "I've never met a client who, regardless of their political affiliation, is not interested in proper estate planning."
Billionaires, or even ordinary millionaires, hire these grants to preserve their wealth. Defeating the tax officer is why they are paid. And so the industry in Silicon Valley is already considering what exactly it will do.
When it comes to capital gains tax, expect the Silicon Valley titans to hurry to secure their profits at this year's lower tax rate (assuming the final tax schedule isn't retroactive, a provision that is vigorously opposed.) That means a number of startups could be sold towards the end of the year. Or that investors who feel they have to sell stocks at some point are more likely to do so this year than next. According to Chye-Ching Huang, a tax policy expert at NYU, research into previous capital gains shows that there is often an increase in realizations in the year before a new tax goes into effect.
Others may not sell at all in the hopes that a new government or Congress could completely reverse the cuts. And meanwhile, billionaires can borrow more by using their holdings as collateral – a common practice for tech titans, Zucman pointed out.
Asset managers acknowledge that capital gains tax evasion in the event of death will be difficult without the angel of death loophole. But they still have a few tricks up their sleeves. They say that in their wills, their clients will increasingly direct more of their valued wealth to charity rather than to the US Treasury Department. ("Charity is a way of preserving, not exhausting, family wealth," observed one wealth manager.) They will – and have been for the past few months – their estate planning, which involves the engineering of a complex network of trusts and companies that building the rich to give money to their heirs, part of an attempt to die while technically having nothing in their name.
"If you do a good job, you die for nothing," remarked an advisor to the ultra-rich in Silicon Valley. “In theory, the increase doesn't matter because you've already given all of your assets to your children, and who cares? You spend your last dollar the day before you die. "
And even if it is impossible to bypass the accrual, the tax bill – and to the chagrin of progressives – tax receipts will not be due until after the billionaire dies. So for young tech billionaires, this is a problem for the distant future. Who knows what America’s tax policy will look like then? And for progressives today that means less money to solve today's problems.
Then there is the more general feeling that the house always wins, so to speak. For example, investment advisors are already exchanging ideas for new, underutilized tax hacks that could be pursued more aggressively. It's hard to predict what loopholes will emerge in a new federal tax law, but it's noteworthy that both tax activists and wealth advisors share the view that the tax avoidance industry will remain strong.
Biden's plan aims to combat this by spending $ 80 billion to bolster the IRS's investigative and enforcement capabilities. However, there is great skepticism that the Biden Plan will generate its targeted $ 700 billion in revenue – in part because the ultra-rich are so good at cat-and-mouse.
What is emerging in Silicon Valley is a struggle not only between laws and lobbying, but also between common sense and leeway. Tax activists acknowledge that asset managers may have the upper hand in the short term, but hope they will cash in on the long term.
That money, Huang says, would enable America "to make lasting investments in children and families – who are not the heirs of multibillion-dollar families."