President Joe Biden could soon discover that tax growth on billionaires is more complicated than it seems.
U the new president wants the rich to pay a lot more in taxes, to finance a $ 1.8 trillion plan invest in things like childcare, education and tax cuts for the poor that are aimed at reducing inequality.
But staying in the other corner of the ring is a sophisticated wealth management and accounting industry that is ready to fight, eager to temper any aggressive proposal and exploit every loophole to please its customers who pay them big money. to defend every dollar.
Over the next few months – and over the next few years, yes Biden’s plan manages to pass in one form or another – These forces meet. Passing the tax invoice is only the first step. Execution could be harder. No matter what the Democrats intend, they may find that their plan leaves technology billionaires off the hook.
And so the wealth management industry is full of cocksure optimism that can fool the bureaucracy.
“The rich will find ways around it,” predicted a wealth manager. “There are too many ways – perfectly acceptable ways – to defer, minimize, or even avoid taxes.”
What wealth managers and pro-tax activists share is a belief that Biden’s proposal poses more of a threat to millionaires than to billionaires – because billionaires can often be more patient when it comes to dealing with money laundering. taxes, choosing the exact moment they want to pay them. Millionaires need to work harder to find a smart solution.
The Biden plan will increase the federal tax rate for people who earn more than $ 450,000 a year to nearly 40 percent. It would increase the tax rate on capital gains of the ultra-rich – the tax rate paid by wealthy entrepreneurs when they sell a company or wealthy investors when they sell a stock exchange – to a sum of more than 40 percent. The White House would put an end to the so-called “Angel of Death” pit that allows the rich to effectively avoid tax on capital gains without assessing the tax if the asset is passed on to an heir. And crucially, Biden plans to increase the firepower of the IRS, a move the administration thinks could generate more than a third of the $ 1.8 billion in revenue earmarked for the tax audit.
And it’s true that these proposals have sent at least some of the ultra-rich to pedal brakes, more than half a dozen wealth managers and accountants for some of Silicon Valley’s wealthiest families have told Recode.
Over the past few weeks, more than a few wealthy executives and investors – including those who have made a fortune in the technology industry – have fired e-mails and marched in meetings with their money managers in a state of panic. Did they have to pay a capital gains tax that could mean more than half of their annual earnings went to both the federal government and California? Will their children really be unable to access the intergenerational wealth that family patriarchs and matriarchs have worked so hard to build?
Yes, there are “mini freakouts at every customer meeting we have,” said a wealth manager for the Silicon Valley rich.
To prepare for a world where Biden’s plans may become a reality, wealthy people across the Bay are rushing to get their teams to draft legal documents to try to prepare Biden’s plan that could pass. One source said that the tax lawyers he works with have already said they will not take on more clients after September because they anticipate so many last-minute activities in 2021. Another said he had noticed more and more. customers who were talking about moving to Puerto Rico in favor of taxes following Biden’s proposal.
But there are a litany of reasons why tax experts are not as concerned as their clients. And it’s not just because activists and wealth managers expect the Biden plan to be significantly watered down if and when it eventually passes Congress.
There’s evidence – that the walk in the higher tax bracket counts little because 0.01 percent don’t make their fortune through a salary; they do so by founding or investing in companies. There is an obvious fate – that the increase in the rate of capital gains can be circumvented if the rich avoid “realizing” the gain at a time when that higher rate is in place. And then there’s even less obvious – the mega one–billionaires can very successfully avoid ever paying a capital gain tax by using loans, charitable contributions and a Byzantine system of trust to keep their fortune from Uncle Sam.
To Gabriel Zucman, an influential progressive economist who studies tax payments from billionaires, the Biden plan has a “serious limitation.”
“Whether you’re Jeff Bezos or Elon Musk or tech billionaires, it’s very easy to keep [your] actions and at the same time to borrow money to buy clothes – houses, private jets, or any kind of consumer goods, ”Zucman said.“ The other thing in the Biden plan is to tax capital gains to death. But obviously most of these tech billionaires are quite young, which means they could even pay very few taxes as a fraction of their wealth for many years and maybe even decades. ”
Essentially, technical titans will resist selling shares in a year when Biden capital growth is in effect (not that active executives made much of that sale at first, for fear of scaring the stock market). And that even if Biden succeeds with his plan to slash the benefit that allows billionaires to still avoid paying taxes on capital gains by leaving the estate to an heir – a privilege called the “step-up” basis , or the aforementioned Angel of Death gap – Silicon Valley’s ultra-rich may have been paying more, but only for decades since they died.
The irony is that Zucman, the academic mastermind behind the Liberals ’demands for a wealth tax, broadly agrees with the wealth defense industry on one key point: that the ultras will be able to defend themselves. some of the most intrusive proposals of the Biden plan. , potentially defanging the administration’s plan to collect hundreds of billions in tax revenue. The difference is that for Zucman, that’s why Biden has to go even bolder. To wealth managers, it’s probably because Biden shouldn’t even try.
“Regardless of where customers fall on the political spectrum, no one is excited to pay more taxes,” said a wealth manager. “I have never met a client, regardless of their political affiliation, who is not excited about proper wealth planning.”
Billionaires or even regular age millionaires take on these financial aids to preserve their assets. Beating the tax man is why they get paid. And so the industry in Silicon Valley has already strategized on what exactly it will do.
When it comes to capital gains tax, expect the Silicon Valley titans to rush to block their earnings at this year’s lower rate (assuming the final tax plan isn’t applied retroactively, a provision that will be fought hard.) This means that a startup rash may look to sell towards the end of the year. Or that investors who feel they need to sell stock at some point soon could do so this year instead of next. Research on previous high capital gains shows that there is often an increase in earnings in the year before a new tax goes into effect, according to Chye-Ching Huang, a tax policy expert at NYU.
Others could not sell at all, hoping that a new administration or a new Congress could cancel the cuts altogether. And meanwhile, billionaires can take out more loans using their stocks as collateral – a common practice for tech titans, as Zucman noted.
Wealth managers admit that evading tax on capital gains at death will be difficult without the Angel of Death gap. But they still have some tricks up their sleeve. They say their clients in their wills will increasingly direct their precious fortunes to charity rather than to the U.S. Treasury. (“Charity is a way to maintain the family’s wealth, not to diminish it,” one wealth manager remarked.) They – and in recent months, have already – increased their wealth planning, which is the engineering a complex network of trusts and companies that the rich build to pass on money to their heirs, part of a test of dying while technically owning nothing in their name.
“If you’ve done a good job, you’re going to die with nothing,” he remarked a helping hand to Silicon Valley’s ultra-rich. “In theory, the step-up doesn’t matter because you’ve already given all your possessions to your children, so who cares? Spend your last dollar the day before you die.”
And even if avoiding the provision is impossible, the tax bill – and the tax revenue, unfortunately for the progressives – will not be discounted until the billionaire dies. So for young tech billionaires, this is a problem for the distant future. Who knows what America’s fiscal policy will look like then? And for progressives, it means less money today to solve today’s problems.
Then there’s also the more general sense that the house always wins, so to speak. Wealth advisors are already trading ideas back and forth for new underutilized tax hackers, for example, who could be prosecuted more aggressively. It is difficult to accurately predict which gaps will emerge in a new federal tax bill, but it is noteworthy that both tax activists and wealth advisers share this view that the tax evasion industry will remain strong.
Biden’s plan seeks to combat this by spending $ 80 billion to strengthen the IRS’s investigative and enforcement capabilities. But there it is wide skepticism that the Biden plan will raise the $ 700 billion revenue it seeks – in part because the ultra-rich are so good at cat-and-mouse gaming.
What is forming in Silicon Valley is a battle not only of laws and lobbying, but of ingenuity and room. Tax activists admit that wealth managers may have the upper hand in the short run, but hope they cut themselves in fortunes in the long run.
That money, Huang says, would allow America to “make permanent investments in children and families – who are not the heirs of multimillion-dollar families.”