• Biden and the Four Pillars

Biden and the Four Pillars

27 April 2021

In our publication, The World of Private Clients, four key pillars were identified that underpin change in the world arena affecting the high net worth population globally. Generational shifts have been underway for some time with the expected shift of wealth over the next decade or so but additionally, much has been influenced by the experiences of 2020 and the ongoing ramifications of a global pandemic and the hoped-for outturn.

Tax changes in the US are expected following the election of Joe Biden, his proposals to spend, signalled by the $2 trillion recently allocated for infrastructure, and it is likely that this will be a catalyst for higher US taxes. This may well apply to high net worth US families, particularly those with international interests, as well as foreign families doing business within the US. There may also be more radical changes – some are being advocated on the left of the Democrat party after the Georgia run-off for the two Senate seats in January. There are indications that wealthy families in the US and beyond have done well financially during the COVID-19 crisis period and that Biden’s administration will look to tackle the tax-take equation for this population in a number of different ways.

In recent years, numbers of tax audits have plummeted as the IRS lost enforcement personnel to undertake these activities – some believe that the tax-take has suffered as a result. Biden has signalled a keen desire to invest in the IRS processes and personnel as well as working to close perceived loopholes across borders. A study that the Democrats commissioned, suggests the IRS could collect around $175 billion from the top 1% of the total tax population simply from greater scrutiny and examination. They are looking to draw on the experience in certain other countries, where the onus on greater transparency and burdens on sophisticated taxpayers and their advisors have produced results. In the US tax system, with worldwide obligations on the American citizen wherever they reside, there is the prospect of greater focus on foreign interests, as well as closing out the advantages of tax havens altogether. The prospect of more international tax audits looms and those global citizens who are still part of the US system are likely to be targeted. Whilst the cost of enforcement is higher, with the use of digital tools at their disposal to scrutinise the swathes of information required to comply with FATCA and other informational reporting, this is the likely approach by the IRS in the next few years.

Beyond audit and scrutiny, the proposed changes to estate tax rates highlighted where there may be some substantive desire in the new administration to reduce exemptions and increase the take. Families that did not start to take action during 2020 are likely to consider it essential to give generational planning some attention in 2021. The proposed doubling of capital gains tax to 39% for those with incomes of over $1m a year also sends a strong signal.

Many of these changes are unlikely to have the speed of impact in terms of a tax-take collection that Biden and his administration would want to achieve. Bernie Sanders introduced a bill in late March to not only reduce the estate tax exemption to $3.5 million dollars and to increase the top rate on larger Estates but also to separate the gift tax exemption and to reduce lifetime gifts exemptions of only $1 million. While this is unlikely to muster enough support, it does illustrate the reversal in prevailing philosophies and the quest for greater contributions from wealthy estates and families.

The increase in the top rate of tax is going to be a priority alongside the actions to try and increase the tax take through the audit processes and examinations. This is a strategy for wealthy families which Biden’s administration appears to be set upon, alongside the keen desire to increase corporate tax rates substantially and look to a minimum level of tax-take based on profits booked across international businesses.

If you would like help and advice on the future of your family finances please contact Mark Walters or Helen Griffiths.