Impact of Tax Proposals on Businesses & Individuals

I have had many customers ask me about how some of the recent economic proposals that have been presented by Vice President Kamla Harris would impact the economy and markets.  Because of the number of people who have asked my opinion, I have decided to write this quick post about what I believe the impact would be.  I am not writing this to be political, although I am sure it will come off that way.  But regardless of the party making the proposal, I believe people need to understand the potential impact.  Many of the points I am bringing up here have also been echoed by very prominent economists and financial analysts. 

Price Caps on Essential Goods Like Food and Medicine – There are multiple problems with price caps, otherwise known as “price fixing”, which have been evidenced every time such programs have been put into place.  First, they decrease the supply of products.  Companies that cannot afford to make a profit on making the product stop producing it.  Secondly, the quality of the product goes down.  In order to continue to make a profit, those companies still making the product make it cheaper, cut corners and make a lesser quality product so they can still make money.  Third, black markets start to show up where people can still buy the product at even higher prices than before the price cap because people still need the product but there are now shortages.  Free markets generally encourage competition, ingenuity, and development, and businesses naturally try to find ways to compete and bring lower products to the market.  But if the government dictates price, less product will eventually come to market, driving competition for what little product exists and substantially raising prices. 

Put a 25% Capital Gains Tax on Unrealized Capital Gains on Wealthy Individuals – I want to start off by explaining how unrealized capital gains works.  If you buy a stock today for $1 and that stock goes to $10 by the end of the year, you have an unrealized gain of $9 so long as you have not sold that stock.  However, that gain is on paper only.  If you have not sold that stock, you have received no cash financial gain and currently you pay no tax on that gain until you sell the stock.   If you were above the income threshold set by the proposed tax, as of the end of the year you would be required to pay a 25% tax on that $9 gain or roughly $2.25.  However, if you have not sold that stock, you may not have the actual money to pay that gain.  Furthermore, what if on January 2nd of the following year the value of that stock falls back down to $1.00.  You would still be required to pay a $2.25 tax on a stock based on the value at the end of the previous tax year that is now no longer worth even $2.25.  Taxing investments like this for anyone creates a huge issue because it forces investors to sell assets to pay unrealized gains each year.  When lots of assets need to be sold to pay unrealized gains, that in and of itself drives down the value of the market for that asset because there is less demand.  That ends up impacting the value of stocks in every investor’s portfolio, including those assets in retirement accounts.  What happens if your investments are not in the stock market but are in private businesses or real estate?  Is the IRS going to require you get an appraisal or valuation done every year and then pay taxes on unrealized gains on those assets?   If you are a real estate or business owner whose assets are tied up in non-liquid assets, how do you pay those gains?  Likely you are forced to sell part of your business or your whole business or some of your real estate holdings to pay that tax.  Once again, that drives down the value of business assets and real estate assets if they are being forced to be sold to pay taxes on unrealized gains and anyone else who buys them might have the risk of gains.  Although this tax is supposed to start on the very rich, at what point does the government reduce the minimum level of income or net worth for this tax?  What might start with a billionaire may eventually drop down to a millionaire or even less.  Taxing unrealized gains would be very destructive to the economy.  Even if you only consider it taxing the wealthiest, the majority of the wealthiest Americans invest in and employ a great many American workers.  Even taxing billionaires this way will reduce market values for everything from publicly traded companies to private companies and even real estate values.  Also, the wealthiest in our society create the most jobs.  If they now need to use all of their cash to pay unrealized gains, then where will the money come from to help create jobs.  This will hurt new business development, job growth, and business, stock, and real estate values in the economy as a whole and would have a major adverse impact on our economy.  Over time there would be less value to tax, and everyone would be poorer. 

Increase in the Corporate Income Tax Rate from 21% to 28% - When corporate tax rates were reduced under the Trump Administration, over the next several years (before the pandemic) the amount of taxes collected by the Federal Government actually increased (https://www.statista.com/statistics/200405/receipts-of-the-us-government-since-fiscal-year-2000/).  This is due to the fact that with lower tax rates more companies were able to pass savings onto employees with higher wages, pay more in dividends, and the value of publicly traded companies stock prices increased because the business reported larger net profits, benefiting investors and retirement accounts.  The lower tax rates actually helped to grow the economy and increase overall taxes being collected.  The lower tax rate also made the U.S. more competitive than other nations with lower tax rates, helping to drive business revenues back to the U.S.  Increasing the corporate tax rate will once again encourage businesses to report income outside of the U.S. where corporate tax rates are cheaper.  It will also cause businesses to either need to raise prices to maintain the same level of profitability (impacting consumers), reduce salaries or staffing to remain as profitable (impacting the job market), report less profits (impacting the stock price hitting consumers, investors and retirees), or do a combination of all three.  Overall, you can expect tax collections across the U.S., despite the higher tax rate, to likely drop as there will be less investment and less tax revenues coming in from everyone else that benefits from lower corporate tax rates.   

Let the Trump Tax Rates Expire – The Trump era tax cuts not only impacted businesses, but it impacted most wage earners.  The tax cuts increased the income level for qualifying to pay for higher taxes and lowered the tax rate in just about all tax classes.  Repealing the Trump era tax cuts would cause an increase in tax rates and lower the minimum level before higher tax rates come into play, which will impact almost all Americans that pay taxes.  This will pull money out of the economy and hurt both individuals and businesses, as consumers will have less money to spend on products.   

$50,000 Tax Credit to New Business Owners – A tax credit to new business owners does not do anything to promote new businesses.  The way tax credits work is that the first $50,000 of taxable income for a business is no longer taxable.  However, when you start a business, you still incur all of the same start-up expenses.  And if you have losses the first couple of years, you get to write those losses off on your tax return and you have no taxes to pay.  In fact, those losses will typically carry over to future years offsetting income in those future years.  All this benefit does is allows a business not to be taxed on its first $50,000 of profit beyond previous year’s losses.  That profit is going to show up well after the business has been started and is operating profitability, so the tax credit does nothing up front to promote or cover the costs of starting a new business.  Although small business owners starting a new business could benefit from not having to pay taxes on their first $50,000 in profit after writing off start-up costs, this $50,000 does nothing to help with the costs of starting up a business and the risks associated with doing so.  It does not put money into new business owner’s hands until years later, and only if that business is successful and makes a profit.  There is also no plan to pay for this credit, which means the national debt could grow further.

$25,000 One-Time Housing Purchase Assistance – Although most people are in favor of providing help for those looking to buy homes, providing a $25,000 credit or assistance would not help the situation.  First, if every first-time homebuyer can qualify for an additional $25,000 in free money, that is just going to work to drive up the value of all entry level homes by at least $25,000.  If everyone can afford to bid $25,000 more, the starting value in the market is going to go up, making homes less affordable.  Secondly, there are already government funding programs in place where a home buyer can buy a home with $0 money down or limited money down.  Yes, there are qualifications for those programs, but they already exist.  If someone cannot qualify for those programs, it is unlikely they would be able to qualify to get a mortgage to buy a home with $25,000 down.  There is no need to give individuals $25,000 more to put down on their first home.  Lastly, there is no plan to pay for this $25,000 assistance.  This cost is going to help increase the national debt even further. 

Increase the Child Tax Credit to $6,000 for Newborns – The child tax credit already exists and increasing would provide more money back to those with young children, which would likely get spent on supporting those children.  The only concern here is how will this credit be paid for? 

Some of these tax proposals are very dangerous and many will have a negative impact on the economy.  It is important for people to understand the impact of these tax plans.