Retirement Watch Lighthouse Logo

Major Tax Increases Are in The Works

Published on: Mar 18 2021

Shortly after the $1.9 trillion stimulus law was enacted, President Biden’s aides began publicly discussing the coming tax increases.

But, in fact, the tax increases have already started. Three tax increases were slipped into the stimulus law. They have been estimated to raise tax bills by about $60 billion.

One increase limited the amount of losses owners of unincorporated business could deduct on their tax returns to $500,000. Another limits the deductions publicly traded corporations can take for compensation paid to their 10 highest-paid employees. The third provision is a technical change in how multinational companies compute their taxes on global income.

The tax increases were added to the law late in the process, so lobbyists were caught by surprise and were unable to mobilize. These tax increases are the tip of the iceberg. The president wants to pay for major new spending on infrastructure, climate change and education with a combination of new debt and tax increases.

One former Biden aide forecast that the president would soon propose $1 trillion in tax increases. Current presidential appointees, including Treasury Secretary Janet Yellen, have started outlining likely proposals.

An increase in the corporate tax rate and changes in how global companies calculate their U.S. taxes are almost certainly going to be proposed.

Other likely proposals include doubling the long-term capital gains tax rate, at least for those with more than $1 million in income, taxing unrealized capital gains at death (also known as the repeal in the step-up in basis) and increasing the top individual tax rate.

President Biden also is likely to propose changing the estate tax, perhaps back to the 2009 lifetime exemption and tax rates. Proposals to eliminate some estate planning strategies are likely.

Phasing out various individual and business deductions and proposing a financial transactions tax also have a lot of supporters in the White House.

However, a new wealth tax is considered unlikely by many observers. President Biden has said he would limit tax increases to corporations and to individuals making over $400,000 per year.

A spokesperson this week clarified that the $400,000 figure applies to married couples, so individuals making less than that amount could be hit by higher taxes when each spouse earns less than $400,000 but the couple jointly earns more than $400,000.

The proposals are likely to change a lot once Congress works on them. Lobbyists are also closely watching. My expectation is that people who are making less than $400,000 will pay higher taxes. Increases in tax rates might be imposed only above the $400,000 threshold. But changes in various tax breaks are likely to increase taxes on other taxpayers.

Upper-Income Earners, Corporations Spending Less

The pandemic changed some economic behaviors. How long those changes will continue in the post-pandemic era will affect the rate of economic growth.

Americans saved more during the pandemic, with the savings rate jumping to record levels. Surveys found that Americans saved a high percentage of their stimulus payments.

Those with higher incomes significantly increased their savings rates, according to a survey from Pew Research. About 32% of upper-income adults increased their saving and reduced spending, compared to 17% of lower-income adults and 23% of all respondents to the survey.

Research reports conclude that Americans put away between $1.5 trillion and $1.8 trillion of “excess savings” over the last year. Excess savings are those that exceed what would have been saved at the previous rate of saving.

Higher savings can provide more capital for the financial markets. But upper-income households account for a high percentage of spending, especially for leisure and entertainment. If savings rates stay at recent levels, economic growth could be lower and some economic sectors could be hurt.

In addition, corporations are hoarding more cash. The cash holdings of S&P 500 companies rose to a record level, according to S&P Global. Many companies are issuing debt at low interest rates and keeping the cash.

Even at companies with low credit ratings, the ratio of cash to debt more than doubled in the last year.

High corporate cash holdings tell us that businesses are not spending to expand by hiring more employees or by buying buildings and equipment. That likely means lower levels of economic growth.

A Lesson in Markets: Public Toilets

Decades ago, public toilets were common in U.S. cities. Apparently, public toilets still are common in many countries. But they now are few and far between in the United States.

The disappearance of public toilets is a result of laws enacted across the United States, according to economist John Cochrane. When public toilets were common, most of them were pay toilets that were provided by private businesses.

In the 1960s, there was a movement to ban pay toilets. The advocates argued that it was inequitable to charge for using toilets and it was a basic human right to be able to use a toilet regardless of one’s resources.

The movement was successful, and over time, public toilets all but disappeared in the United States. The article is an entertaining and informative read.

The Data

New unemployment claims increased to 770,000 in the latest week from 725,000 the previous week. The previous week’s number was revised higher by 13,000 from the initial report.

Continuing claims for regular unemployment benefits were almost unchanged at 4.12 million.

The number of people receiving some form of unemployment assistance increased by more than two million to 20.1 million. This increase was due to more participation in the two pandemic-related benefit programs.

Home builder confidence declined in February, according to the Housing Market Index from National Association of Home Builders (NAHB). The index was reported at 82, compared to January’s 84. Any level above 50 indicates more home builders view sales conditions as good than view it as poor.

The index peaked at 90 in November. Builders reported higher customer traffic and strong demand. But, they’re concerned about rising prices for lumber and other supplies. Supply shortages and delayed deliveries also are problems.

Housing starts reflect the decline in builder confidence. Starts declined 10.3% in February from January’s level. The February starts also were 9.3% below those of February a year ago. Single-family home starts declined 8.5% in February from January’s level.

Analysts consider bad weather to be a major reason for the decline in February. In the western part of the country, which wasn’t as affected by the weather, housing starts increased significantly in February.

Retail sales declined sharply in February. Sales declined 3.0% from January’s level. That’s the fifth worst month since the report began in 1992.

But January’s sales increase was revised higher to a 7.6% increase from the originally reported increase of 5.3%. That makes January the third-best month in the history of the report.

Averaging the two months produced a 2.2% increase, which would rank among the 10 best ever.

January’s sales were especially strong because of the fresh round of stimulus payments issued following December’s legislation. There was due to be a decline in February. Some economists have blamed the bad weather in February for part of the drop.

Inflation at the wholesale level is moving higher, but that could be largely due to rising gasoline prices.

The Producer Price Index (PPI) rose 0.5% in February, following a 1.3% increase in January. Over 12 months, the PPI is up 2.8%.

But after excluding food and energy, the PPI rose only 0.2% in February after a 1.2% increase in January. Over 12 months, the measure is up 2.5%.

Consumer sentiment in early March, as measured by the University of Michigan, rose to 83.0 from 76.8 at the end of February.

This is the highest level in a year and well above expectations. Both the current conditions and expectations segments of the index increased significantly.

The Empire State Manufacturing Index jumped to 17.4 in March from 12.1 in February.

The Philadelphia Fed Manufacturing Index soared. It was reported at 51.8 for March, compared to 23.1 in February. This is the highest level since April 1973, almost 50 years ago.

The new orders component of the index rose to a 50-year high. Only 7% of businesses reported a decline in activity.

We don’t see that strength in the industrial production numbers. Production declined 2.2% in February, though January’s production was revised higher to a 1.1% increase compared to the 0.9% increase originally reported.

Manufacturing production declined 3.1% in February, compared to a 1.2% increase in January (revised higher from 1.0%).

The Markets

The S&P 500 rose 1.97% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 2.30%. The Russell 2000 increased 2.24%. The All-Country World Index (excluding U.S. stocks) added 1.79%. Emerging market equities improved by 2.12%.

Long-term treasuries lost 3.38% for the week. Investment-grade bonds declined 0.73%. Treasury Inflation-Protected Securities (TIPS) fell 0.29%. High-yield bonds gained 0.01%.

On the currency front, the U.S. dollar fell 0.44%.

Energy-based commodities increased 0.48%. Broader-based commodities rose 0.62%. Gold added 1.16%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Seriesclick here.

A recent five-star review of my book on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

bob-carlson-signature

Retirement-Watch-Sitewide-Promo

Log In

Forgot Password

Search