The Real Inflation Problem Is Corporate Profiteering

The prices of everyday goods are going up, and everyone from members of Congress to talking heads on cable news have their own diagnoses as to why it’s happening. But they’re all missing the biggest piece of the puzzle about what is to blame—namely, corporate profiteering.

You’ve heard a dizzying array of explanations about inflation. Biden administration officials have said the Covid pandemic resulted in supply chain disruptions, which are now being ironed out. Republicans are blaming Biden’s policies for putting too much money into the hands of working families.

Corporate leaders are blaming it on an inability to hire workers and a workforce that wants better pay and working conditions. Economists say that while inflation is indeed occurring, the expectation of inflation is truly what’s altering consumer attitudes and behavior.

What all these arguments miss is that, despite whatever rising costs exist for raw materials or transportation or other underlying factors, the incontestable truth is profits are way up for the largest corporations in America.

And what that means is pretty simple: Corporate America has seized on the fears of inflation to jack up prices on you and make a ton more money. According to The Wall Street Journal, nearly two out of three of the biggest U.S. publicly traded companies had larger profit margins this year than they did in 2019, prior to the pandemic. Not just profits. Larger profits.

Nearly 100 of these massive corporations report profits in 2021 that are 50 percent above profit margins from 2019. CEOs are quick to suggest to media that they have been forced to raise prices because of one difficulty or another.

However, my organization More Perfect Union reviewed recent corporate earnings calls featuring CEOs of some of the largest companies in the world, like Tyson Foods, Kellogg’s, Pepsi, Mondelez (a huge snack food and beverage company that used to be known as Kraft), and others. And we found jubilant executives revealing that price hikes are great for business.

In these calls, business leaders employ fancy financial lingo to tell large shareholders how they are engaging in “pricing improvements” and “successful pricing strategies.” They tell you they are experiencing customer “elasticities” to price increases at historically low levels. When you decode what they’re saying, it’s nothing less than a euphoric articulation that they’re able to pass off price increases to consumers, who, in the words of legendary investor Warren Buffett, are “just accepting it.”

The stocks have in turn moved higher and higher. (And interestingly, when a corporation like Target announces it hasn’t raised prices despite strong earnings, investors are punishing it by pushing the stock downward.)

In an interview with Fox Business, John Catsimatidis, a conservative pundit and billionaire CEO, revealed very simply what his C-suite colleagues are doing. “Why give something away if you don’t have to, and you can have a bigger margin?” he said. Right. It’s corporate price gouging at work.

Beef prices are up this holiday season. Why are they up? Because a consolidated market has allowed monopolists like Tyson’s, Cargill, and National Beef to rake in more profits while ensuring that very little of that goes to ranchers and farmers who are raising the cattle.

Home Depot and Lowe’s recently posted incredible earnings, pleasing giddy investors. CNBC’s voluble Jim Cramer observed that these two companies “can do no wrong because they’re passing on rising costs to the public, and the public has no choice …because these two chains have single-handedly wiped out the competition already.”

The power is entirely in the hands of large corporations, and they’re going for the gold. This story of corporate greed is being missed in the national inflation conversation.

But there’s more! Think about the devious design of what corporations have been up to. For months, they have, with one hand, fueled talk of inflation as a way to make obscene profits off the backs of consumers. That’s bad enough. But with the other hand, they have been manipulating the talk of inflation to engage in a full-frontal assault on President Biden’s efforts to pass a Build Back Better bill for working families.

The U.S. Chamber of Commerce has called Biden’s proposal an “existential threat,” and it—along with many corporate P.R. groups—has led a multimillion-dollar barrage of corporate ad spending to try to dissuade voters about it.

Corporate America is also feeding its talking points into the hands of Republican lawmakers and media outlets that pin the blame for inflation on Biden and falsely warn that enacting a working families bill is only going to feed it further. Because the Build Back Better act will have increased taxes on corporations, these big businesses are eager to kill it. They are not about to give up any of their record profits to invest in the safety net of America.

As we head into Thanksgiving and Christmas, and we all look forward to large enjoyable feasts with friends and family, we should rightly harbor anger about inflation. Not just that they made us pay more for turkey, cranberries, and pie crusts.

We’re having to pay more because corporate America made a choice to raise prices on us, and then on top of that, it tried to manipulate your fear about those prices to keep you from getting paid leave, home care, childcare, and climate change action. Corporate America made you pay more while trying to make sure it didn’t have to.

By:

Bat Viruses? Puppy Experiments? Fact-Checking Critics’ Latest Claims About Dr. Fauci.

Dr. Anthony Fauci is facing a storm of new conservative-led criticism that the National Institute of Allergy and Infectious Diseases — which he’s led for decades — funded everything from risky coronavirus research in China to unnecessary experiments on dogs; here, we break down the outrageous and not-so-outrageous new claims, and the evidence supporting them.

Key Facts

Claim: House Republicans claim a letter sent to them by the National Institutes of Health last week “confirmed” a 2018-2019 study in the Chinese city of Wuhan involved gain-of-function research, a contentious method of studying viruses by enhancing them — despite denials from Fauci that the NIH funded gain-of-function research in Wuhan.

Context: The NIH letter said mice unexpectedly “became sicker” during an experiment in Wuhan involving bat coronaviruses whose spike proteins were replaced — but it didn’t mention gain-of-function research, and Fauci and NIH Director Dr. Francis Collins argued last week the study didn’t meet the definition of gain-of-function, though several experts still told the New York Times and The Intercept this kind of research is risky.

Claim: Rep. James Comer (R-Ky.) told Fox News last week the NIH letter “proves all along that this virus was started in the Wuhan lab,” tying it to months of insinuations from Republicans that Covid-19 began after a virus leaked from a lab.

Context: These bat viruses “could not possibly have caused the COVID-19 pandemic” because they’re too genetically distinct, the NIH says, an argument seconded by many scientists and the EcoHealth Alliance, the nonprofit recipient of the Wuhan NIH grant.

Claim: Separately, in recent weeks, lawmakers like Rep. Nancy Mace (R-S.C.) have chastised NIAID for funding “barbaric and gruesome” experiments on dogs, including studies allegedly exposing dogs to insects, cutting their vocal cords or euthanizing them.

Context: NIAID defended its dog experiments in a statement: It said researchers need to follow federal guidelines on humane treatment of animals, and dogs are sometimes given vocal cordectomies “humanely under anesthesia” to cut down on hazardous noise.

Claim: News outlets and advocates have spread photos of beagles from Tunisia whose heads were put in mesh cages filled with flies, part of a parasitic disease study that initially cited NIH funding when it was published in PLOS Neglected Tropical Diseases.

Context: NIAID told Forbes it actually “did not support this specific research,” and PLOS spokesperson David Knutson says the journal is issuing a correction to clarify the study’s funding was “erroneously attributed to the US National Institutes of Health.”

Chief Critic

Fauci has served as the director of NIAID — part of the NIH — since 1984, but he earned mainstream fame after Covid-19 emerged, and his support for public health measures like mask-wearing and social distancing has driven criticism from conservatives. In recent months, he’s also clashed with Sen. Rand Paul (R-Ky.) over the NIH’s ties to bat virus research in Wuhan. Most notably, during an explosive July hearing, Paul accused Fauci of lying about whether this work involved gain-of-function methods, and Fauci insisted the NIH hasn’t funded gain-of-function research in Wuhan.

Key Background

Gain-of-function research is ill-defined, and opinions on the practice vary widely. Some scientists view it as a useful way of predicting viruses’ future trajectory, but critics warn modifying viruses could pose a biosafety risk. The NIH paused gain-of-function studies for certain viruses in 2014, and three years later, it reopened this research but added extra scrutiny for any experiments that could enhance pathogens’ effectiveness against humans. However, the Wuhan research — which studied various coronaviruses — wasn’t subject to these additional rules because the bat viruses under study weren’t known to infect people, the NIH claimed in last week’s letter to Republicans on the House Oversight Committee.

Surprising Fact

The NIH’s letter to Republicans also said EcoHealth Alliance was required to report any growth in disease for its experiment beyond a certain threshold, but it “failed to report this finding right away.” NIH’s leader Collins told the Washington Post the group “messed up here,” though its findings weren’t necessarily dire. But EcoHealth spokesperson Robert Kessler told Forbes it believes these claims were a “misconception about the grant’s reporting requirements,” saying the group reported the data in question to the NIH in 2018.

What We Don’t Know

Some of this acrimony is tied to uncertainty about the pandemic’s origin. Fauci and many experts think the virus most likely jumped from animals to humans naturally and argue there’s insufficient evidence to suggest the virus escaped from a laboratory, but other scientists say an accidental leak from a lab is still a plausible theory, and Fauci and the Biden administration say they haven’t ruled out this possibility yet.

Still, even if the virus leaked from a lab, the NIH says the viruses studied in the Wuhan lab with EcoHealth Alliance’s participation were “very far distant from SARS-CoV-2,” the virus linked to Covid-19. Likewise, Kessler said none of those viruses “bear a close enough resemblance to the virus that causes COVID-19 to have played any role in its emergence.” And in his July exchange with Fauci, Paul said he isn’t necessarily alleging the NIH’s research specifically caused Covid-19.

Tangent

Some conservative pundits tied their anger over NIH-funded dog research to broader complaints about Fauci, but dog experiments have been controversial for years. NIAID says its rules around animal testing aim to “ensure the smallest possible number of subjects and the greatest commitment to their welfare,” and argues this research is useful. One study blasted by activists used dogs as an “appropriate model” to test a vaccine for a brutal mosquito-borne parasite, NIAID told Forbes, and another study in Tunisia — which it said is separate from the experiment that placed dogs’ heads in cages — investigated a vaccine for a common parasite by letting dogs roam in an “enclosed open space” during sandfly season.

However, advocates cast this research as cruel and unnecessary. Justin Goodman from the White Coat Waste Project, an anti-animal experimentation group often critical of Fauci, told Forbes in a statement the group’s concerns are “not about photos in Tunisia — or any one beagle lab. It’s about Dr. Fauci’s widespread and long pattern of wasteful and punishing puppy abuse.”

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I am a breaking news reporter at Forbes. I previously covered local news for the Boston Guardian, and I graduated from Tufts University in 2019. You can contact me at jwalsh@forbes.com or on Twitter at @joewalshiv

Source: Bat Viruses? Puppy Experiments? Fact-Checking Critics’ Latest Claims About Dr. Fauci.

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Related Contents:

 

What The New Outlook For Social Security Means For You

Whew! The pandemic had a smaller impact on the Social Security trust funds — that is, Social Security’s solvency — than many feared during the depths of the pandemic downturn.

According to the new 2021 annual report from the Social Security Trustees, the depletion date for the combined trust funds —retirement and disability — is 2033 without any changes to program benefits. That would be when today’s 54-year-olds reach Social Security’s Full Retirement Age. Still, that’s one year earlier than last year’s 2034 estimate.

Depletion date or insolvency doesn’t mean bankruptcy — far from it. Funding from payroll tax receipts will be enough to pay 78% of promised benefits after the combined Social Security trust funds depletion date is reached.

“The trust fund report should be seen as a strength,” says Eric Kingson, professor of social work and public administration at Syracuse University and co-author with Nancy Altman of “Social Security Works for Everyone: Protecting and Expanding the Insurance Americans Love and Count On.”

What the Social Security Trustees Said

The report, Kingson said, “provides information for Congress and the public on what needs to be done to maintain benefits.”

And Altman, president of Social Security Works, chair of the Strengthen Social Security Coalition and a rumored possible Biden appointee to run the Social Security Administration, said this when the Trustees report came out on Wednesday: “Today’s report shows that Social Security remains strong and continues to work well, despite a once-in-a-century pandemic. That this year’s projections are so similar to last year’s proves once again that our Social Security system is built to withstand times of crisis, providing a source of certainty in uncertain times.”

But the Social Security Trustees are strikingly cautious about their estimates involving the impact of the pandemic on the Social Security trust fund and its sister trust fund for Medicare, the federal health insurance program primarily for people 65 and older.

Despite the dry language of actuaries, the uncertainty is apparent.

Employment, earnings, interest rates and gross domestic product (GDP) dropped substantially in the second quarter of 2020, the worst economic period of the pandemic. As a result, the decline in payroll-tax receipts which pay for Social Security benefits eroded the trust funds, though the drop in payroll taxes was offset somewhat by higher mortality rates.

“Given the unprecedented level of uncertainty, the Trustees currently assume that the pandemic will have no net effect on the individual long range ultimate assumptions,” they write.

The Pandemic and Social Security Solvency

But, they add, “At this time, there is no consensus on what the lasting effects of the Covid-19 pandemic on the long-term experience might be, if any.”

The Trustees say they “will continue to monitor developments and modify the projections in later reports.”

Translation: the status quo remains and the forecast for the pandemic’s effect on Social Security’s solvency is cloudy.

Odds are the coming Social Security financing shortfall won’t get sustained attention from either the Biden administration or Congress despite the need to take action before 2034.

The Trustees aren’t too happy about that.

Their report says: “The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits… With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.”

The Political Outlook for Social Security Reforms

But the Biden administration and its Congressional allies are instead focused on threading the political needle for an ambitious $3.5 trillion infrastructure spending package, while also dealing with the fallout from the chaotic withdrawal from Afghanistan.

Leading Republican legislators have called for so-called entitlement reform (think Social Security benefit cuts), but that’s a tough sell in the current Democratically controlled Congress.

“Does the report mean the timetable argues for real concrete action on [addressing solvency issues of] Social Security? Probably not. Will it revive the rhetoric that the sky is falling? Sure,” says Robert Blancato, national coordinator of the Elder Justice Coalition advocacy group, president of Matz Blancato and Associates and a 2016 Next Avenue Influencer in Aging.

The issue over how best to restore financial solvency to Social Security isn’t going away. That’s because the program is fundamental to the economic security of retired Americans. Social Security currently pays benefits to 49 million retired workers and dependents of retired workers (as well as survivor benefits to six million younger people and 10 million disabled people).

However, the tenor of the longer-term solvency discussion has significantly changed in recent years.

To be sure, a number of leading Republicans still want to cut Social Security retirement benefits to reduce the impending shortfall. Their latest maneuver is what’s known as The TRUST Act, sponsored by Utah Sen. Mitt Romney.

It calls for closed-door meetings of congressionally appointed bipartisan committees to come up with legislation to restore solvency by June 1 of the following year. The TRUST act would also limit Congress to voting yes or no on the proposals. No amendments allowed.

What’s Different About Future Social Security Changes

AARP, responding to the Trustees report news, came out vehemently against The TRUST Act’s closed-door reform plan. “All members of Congress should be held accountable for any action on Social Security and Medicare,” AARP CEO Jo Ann Jenkins said.

“The concern seems to be they would look to cuts first, versus a more comprehensive approach,” says Blancato. A more comprehensive approach could include tax increases for the wealthy and technical changes to the Social Security system.

Something else that’s different is that liberals are no longer trying to simply stave off benefit cuts and preserve the program exactly as it is — the main tactic since Republican Newt Gingrich was House Majority Leader in the mid-1990s. That have bigger and bolder ideas.

Most Democratic members of Congress have co-sponsored legislation to expand Social Security or voted in support of incremental increases in benefits, such as providing more for the oldest old and a new minimum Social Security benefit equal to at least 125% of the poverty level (that translates to $16,100 for a household of one).

Addressing Social Security’s shortfall and paying for the new benefits, with the Democrats’ plans, would come from tax hikes, ranging from gradually raising the 6.2% payroll tax rate to hiking or eliminating the $142,800 limit on annual earnings subject to Social Security taxes to some combination of these.

But Social Security benefit cuts are off the negotiating table for the Democrats.

“Biden has made a commitment not to cut and to make modest improvements in benefits,” says Kingson. “He won’t back off that.”

The President has pushed for raising the Social Security payroll tax cap so people earning incomes over $400,000 would owe taxes on that money, too. He has also backed raising the minimum Social Security benefit to 125% of the poverty level.

The Good News for Social Security Beneficiaries

One more piece of Social Security news to keep in mind: Social Security recipients are likely to get a sizable cost-of-living adjustment (COLA) to their benefits in 2022. The exact amount will be announced in October and estimates vary widely, from 3% to as high as 6%. A 6% increase would be the highest in 40 years.

But there’s a catch: Medicare Part B premiums for physician and outpatient services — a significant portion of Medicare’s funding —will also go up due to inflation. And those premium payments usually come right out of monthly Social Security checks.

The Trustees report says the estimated standard monthly Medicare Part B premium in 2022 will be $158.50, up about 7% from $148.50 in 2021 and a 9.6% total increase since 2020. (Monthly premiums are based on income, though, and can exceed $500 for high earners.)

The Trustees report says Medicare’s Hospital Insurance Trust Fund (HITF) has enough funds to pay scheduled benefits until 2026, unchanged from last year. Medicare’s finances stayed stable during the pandemic, with people over 65 largely avoiding elective care. The pandemic “is not expected to have a large effect on the financial status of the [Medicare] trust funds after 2024,” the Trustees report noted.

Like Social Security, the trust fund behind Medicare Part A (which pays for hospitals, nursing facilities, home health and hospice care) is primarily funded by payroll taxes. There will be enough tax income coming in to cover an estimated 91% of total scheduled benefits once the trust fund is insolvent.

Medicare Part D, which covers prescription drugs, is mostly funded by federal income taxes, premiums and state payments.

But the political story about Medicare is less about its projected 2026 shortfall and more about momentum toward expanding the program. The Biden administration has proposed adding hearing, visual and dental care to Medicare benefits, something also being pushed by Sen. Bernie Sanders (I-Vt.) At this time, it’s unclear how those new benefits would be paid for, though they wouldn’t affect the trust fund.

Follow me on Twitter or LinkedIn. Check out my website.

Next Avenue is public media’s first and only national journalism service for America’s booming older population. Our daily content delivers vital ideas, context and perspectives on issues that matter most as we age.

Source: What The New Outlook For Social Security Means For You

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Request a Replacement Social Security Number (SSN) Card Online

Payments Resulting from Disability Insurance Actions Processed Via Manual Adjustment

Analysis of the Social Security System: Hearings Before a Subcommittee of the Committee on Ways and Means, House of Representatives

Supplemental Appropriation Bill for 1962: Hearings, Committee on Appropriations

A biz district is finding the road back

Social Security: Who Is Covered Under the Program

Understanding Supplemental Security Income SSI Eligibility Requirements

Social Protection & Labor Program

 

 

Rich Americans Hunt for Ways Around Tax Hikes They Were Warned About

For wealthy Americans worried about higher taxes, the future is looking bleaker. It’s all but inevitable that the Biden administration, as well as lawmakers at the state level, will target millionaires and billionaires for more levies. The new reality could feel harsh for investors who got used to paying a top rate of 23.8% on their capital gains, an amount they can lower further with many of the deductions, incentives and accounting tricks offered by the U.S. tax code.

Advisers, of course, will certainly try to help their clients adapt to whatever the new rules may be. “We’re not going to evade taxes, but we’re going to avoid them and defer them as much as we can,” Bill Schwartz, managing director at Wealthspire Advisors, said in an interview. “We’re only beginning to explore. Give us a year or two and we’ll find ways around things.”

Wealthy Americans were amply warned that Biden and Democrats in Congress want to raise their taxes. But what has surprised at least some of them is the size and speed of proposals. On Thursday, Bloomberg reported that Biden plans to nearly double taxes on capital gains, pushing the top rate to 43.4% for those earning $1 million or more. If passed by the Democrats’ narrow majorities in Congress, it would fulfill a campaign pledge “to reward work, not just wealth” by bringing the tax on investors up around the level paid on ordinary wage income.

Some members of the top 0.1% expressed anger, denial and grief. The stock market, which has steadily risen since Biden won the election, reacted with dismay, with U.S. equities falling the most in five weeks on Thursday.  “Obviously, this is eye popping,” John Norris, chief economist at Oakworth Capital Bank, said in a note sent to clients. He calmed clients with the suggestion that “it likely won’t come to pass, at least at these levels,” adding: “Remember, elected officials on both sides of the aisle have wealthy donors who probably won’t like this very much.”

Epic Shift

Biden is signaling an epic shift in tax policy: For more than a generation, presidents and Congresses have rolled out the red carpet for investors. When not cutting taxes on capital gains and dividends, lawmakers introduced incentives designed to encourage investment in targeted areas.

They were following both campaign contributors and economic orthodoxy, which insisted that low taxes encourages the sort of investment that boosts economic growth. But then a new generation of economists pointed out that the real-world evidence for those theories was flimsy.

Tax cuts don’t seem to have juiced economic growth in the U.S. over the last few decades, even as they coincided with soaring income and wealthy inequality. Incentives programs — such as Opportunity Zones, a bipartisan idea to steer money to low-income areas implemented by  Donald Trump — have been criticized for rewarding investment that would have taken place anyway.

“Nobody has a crystal ball,” James Bertles, managing director at Tiedemann Advisors in Palm Beach, Florida, said in an interview. However, after the federal government spent trillions of dollars on Covid-19 relief, “most people think taxes are going to go up — it’s inevitable. We just don’t know which taxes are going to go up.”

If Biden is successful, Wall Street and investors who make most of their money from capital gains may need to get used to the idea that their taxes will look more like those of wealthy professionals such as doctors, lawyers, entertainers and even investment bankers who currently face marginal income tax rates north of 50% in high-tax states.

“Nothing is going to surprise us as this point,” said Tara Thompson Popernik, director of research for Bernstein Private Wealth Management’s wealth planning and analysis group. “We’ve been telling our clients for some time that this is likely coming.”

Tax Strategies

Strategies to avoid a higher capital gains rate will depend on the details of the proposal, and on what other provisions get changed. An obvious technique, Schwartz and other advisers said, would be to keep incomes under $1 million — or whatever threshold is in the final legislation.

Investors might also avoid the higher rate by holding onto assets for as long as possible. That strategy, however, could be complicated by other provisions that Biden and Democrats have floated, like beefing up the estate tax and ending a rule, called step-up-in-basis, that allows asset-holders to wipe away capital gains taxes at death.

Life insurance products could also be a way for investors to cut investment taxes, as long as Democrats don’t target those strategies as well. Alternatively, investors and business owners could rush to sell assets now, or before the end of the year — assuming tax changes aren’t made retroactive to the beginning of the year — to lock in lower rates. Advisers said they’ve been discussing sales of art and family businesses, along with highly appreciated stock, by year-end.

“If you’re going to do it anyway, maybe do it now,” Bernstein’s Thompson Popernik said. “The worry is that in the fourth quarter everyone else is going to be trying to make those changes at the same time.” Thursday’s drop in the market prompted worries that, as Biden’s plans solidify and Congress starts to take action, stocks could continue to sell off. But it might not work that way.

“I would tell people to temper their fear of a significant drop-off in the markets,” said Bob Schneider, director of financial planning at Johnson Financial Group. Historically, markets have often risen even while taxes are going up, he said. Indeed, stocks climbed on Friday after strong economic data.

Also, what else are investors going to do with their money? Especially at a time when the economy seems to be bouncing back from the pandemic, many investors want exposure to stocks. “Yields are very low, so there aren’t a whole lot of other options,” Schneider said. “People will realize their gains and probably turn right back around and put their money back in the market.”

By: Ben Steverman

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Critics:
A wealth tax (also called a capital tax or equity tax) is a tax on an entity’s holdings of assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts (an on-off levy on wealth is a capital levy).Typically, liabilities (primarily mortgages and other loans) are deducted from an individual’s wealth, hence it is sometimes called a net wealth tax. Wealth taxes are in use in many countries around the world and seek to reduce the accumulation of wealth by individuals.

Some jurisdictions require declaration of the taxpayer’s balance sheet (assets and liabilities), and from that ask for a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level. Wealth taxes can be limited to natural persons or they can be extended to also cover legal persons such as corporations. According to the Organization for Economic Cooperation and Development, about a dozen European countries had a wealth tax in 1990.

Colombia, France, Norway, Spain, and Switzerland are the countries that raised revenue from net wealth taxes on individuals in 2019, according to OECD statistics. In 2019, net wealth taxes accounted for 3.79 percent of overall tax revenues in Switzerland, but just 0.19 percent in France.

According to an OECD study on wealth taxes, these taxes can deter risk-taking and entrepreneurship, stifling innovation and slowing long-term development. A net wealth tax, according to the study, could encourage investment and risk-taking. Essentially, the point is that since a wealth tax will reduce an entrepreneur’s after-tax return, the entrepreneur would be more likely to invest in riskier investments in order to maximize a possible return. A wealth tax, on the other hand, would be an especially ineffective way to promote risk-taking

 

 

 

Rich Americans Who Were Warned on Taxes Hunt for Ways Around Them

For wealthy Americans worried about higher taxes, the future is looking bleaker. It’s all but inevitable that the Biden administration, as well as lawmakers at the state level, will target millionaires and billionaires for more levies. The new reality could feel harsh for investors who got used to paying a top rate of 23.8% on their capital gains, an amount they can lower further with many of the deductions, incentives and accounting tricks offered by the U.S. tax code.

Advisers, of course, will certainly try to help their clients adapt to whatever the new rules may be. “We’re not going to evade taxes, but we’re going to avoid them and defer them as much as we can,” Bill Schwartz, managing director at Wealthspire Advisors, said in an interview. “We’re only beginning to explore. Give us a year or two and we’ll find ways around things.”

Wealthy Americans were amply warned that President Biden and Democrats in Congress want to raise their taxes. But what has surprised at least some of them is the size and speed of proposals.

On Thursday, Bloomberg reported that Biden plans to nearly double taxes on capital gains, pushing the top rate to 43.4% for those earning $1 million or more. If passed by the Democrats’ narrow majorities in Congress, it would fulfill a campaign pledge “to reward work, not just wealth” by bringing the tax on investors up around the level paid on ordinary wage income.

Some members of the top 0.1% expressed anger, denial and grief. The stock market, which has steadily risen since Biden won the election, reacted with dismay, with U.S. equities falling the most in five weeks on Thursday.

“Obviously, this is eye popping,” John Norris, chief economist at Oakworth Capital Bank, said in a note sent to clients. He calmed clients with the suggestion that “it likely won’t come to pass, at least at these levels,” adding: “Remember, elected officials on both sides of the aisle have wealthy donors who probably won’t like this very much.”

Epic Shift

Biden is signaling an epic shift in tax policy: For more than a generation, presidents and Congresses have rolled out the red carpet for investors. When not cutting taxes on capital gains and dividends, lawmakers introduced incentives designed to encourage investment in targeted areas.

They were following both campaign contributors and economic orthodoxy, which insisted that low taxes encourages the sort of investment that boosts economic growth. But then a new generation of economists pointed out that the real-world evidence for those theories was flimsy.

Tax cuts don’t seem to have juiced economic growth in the U.S. over the last few decades, even as they coincided with soaring income and wealthy inequality. Incentives programs — such as Opportunity Zones, a bipartisan idea to steer money to low-income areas implemented by President Donald Trump — have been criticized for rewarding investment that would have taken place anyway.

“Nobody has a crystal ball,” James Bertles, managing director at Tiedemann Advisors in Palm Beach, Florida, said in an interview. However, after the federal government spent trillions of dollars on Covid-19 relief, “most people think taxes are going to go up — it’s inevitable. We just don’t know which taxes are going to go up.”

If Biden is successful, Wall Street and investors who make most of their money from capital gains may need to get used to the idea that their taxes will look more like those of wealthy professionals such as doctors, lawyers, entertainers and even investment bankers who currently face marginal income tax rates north of 50% in high-tax states.

“Nothing is going to surprise us as this point,” said Tara Thompson Popernik, director of research for Bernstein Private Wealth Management’s wealth planning and analysis group. “We’ve been telling our clients for some time that this is likely coming.”

Tax Strategies

Strategies to avoid a higher capital gains rate will depend on the details of the proposal, and on what other provisions get changed. An obvious technique, Schwartz and other advisers said, would be to keep incomes under $1 million — or whatever threshold is in the final legislation.

Investors might also avoid the higher rate by holding onto assets for as long as possible. That strategy, however, could be complicated by other provisions that Biden and Democrats have floated, like beefing up the estate tax and ending a rule, called step-up-in-basis, that allows asset-holders to wipe away capital gains taxes at death.

Life insurance products could also be a way for investors to cut investment taxes, as long as Democrats don’t target those strategies as well.

Alternatively, investors and business owners could rush to sell assets now, or before the end of the year — assuming tax changes aren’t made retroactive to the beginning of the year — to lock in lower rates. Advisers said they’ve been discussing sales of art and family businesses, along with highly appreciated stock, by year-end.

“If you’re going to do it anyway, maybe do it now,” Bernstein’s Thompson Popernik said. “The worry is that in the fourth quarter everyone else is going to be trying to make those changes at the same time.”

Thursday’s drop in the market prompted worries that, as Biden’s plans solidify and Congress starts to take action, stocks could continue to sell off. But it might not work that way.

“I would tell people to temper their fear of a significant drop-off in the markets,” said Bob Schneider, director of financial planning at Johnson Financial Group. Historically, markets have often risen even while taxes are going up, he said.

Indeed, stocks climbed on Friday after strong economic data. Also, what else are investors going to do with their money? Especially at a time when the economy seems to be bouncing back from the pandemic, many investors want exposure to stocks.

“Yields are very low, so there aren’t a whole lot of other options,” Schneider said. “People will realize their gains and probably turn right back around and put their money back in the market.”

By:

Source: Rich Americans Hunt for Ways Around Tax Hikes They Were Warned About – Bloomberg

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