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Only a few things in life are guaranteed. The first is, if you have kids, you will never sleep again. Sorry parents of babies, you lose a different kind of sleep when they are older. The second is that you will eventually take your final breath. Death is a fact of life. The third is you will pay taxes. Taxes are a key concern every election. Will they go up? Will they go down? When will they go up or down? How will I be affected?
The 2020 presidential election season has been fraught with worry about taxes, and here’s a brief side-by-side comparison of the ‘Big Four’ taxes, and each candidate’s proposal:
The debate usually starts with the impact to paychecks, but focuses only on the highest marginal rate, not the weighted average to which individuals’ earnings will be subject.
A simple, hypothetical example: If you earn $100,000, and the hypothetical tax schedule is 20% up to $50,000 and 30% from $50,001 up to $100,000, then the weighted-average tax rate you actually pay is 25%—NOT 30%. Earnings aren’t taxed at the highest marginal rate in full, because a portion
will be taxed at the lower rate first.
So, while a Biden victory would increase the highest marginal tax rate (timing for the increase is TBD though, more on that later…), all earnings wouldn’t be subject to this rate.
How bad is 39.6%?
Before 1980, the highest average marginal personal tax rate, was 75%! Since 1980, the average has been 39.75%. So, historically speaking, an incremental increase to a high of 39.6 is still (just slightly) below average for the past 40 years.
To reiterate our stance on taxes, we believe an increase is imminent, regardless of who is elected in November. Given the income needed to service our country’s ballooning debt, increased tax revenues will be necessary. The good news is that there is long-term precedent for economic growth and strength, even if rates must increase to pre-1980s levels.
Tax rate increase don’t equate to market declines!
As we noted in our recent blog (you read it, right...mom?), an increase in the highest marginal tax rate- even a dramatic increase- does not spell doom for your investment portfolio. After WWII, the corporate tax rate swelled to 50%, and the highest marginal rate for personal income spiked above 90%, yet the S&P 500® still returned a hefty 467.40% cumulatively during the 1950s.
Tax increase timing
The major elements of the Tax Cuts and Jobs Act passed by the Trump Administration in 2017 is set to sunset in 2025. With a Trump reelection, this expiration date is expected to sustain. With a Biden win, changes prior to 2025 are expected, but it will depend on the economy’s performance. Biden’s advisors are likely to push for no changes to tax rates if the economic recovery from COVID is stalled.
The bottom line is that Presidents come and go, and tax rates go up and down. And, the American motivation to wake up every morning, go to work, save, and spend on the people and things you love will persist. Keep a balanced perspective on the tax discussion. You should always work to reduce your tax bill within the context of your financial plan. It’s one of the key elements you can control! If you’re not already doing this, call us! We can help!
Sources: taxfoundation.org, smartasset.com, wsj.com, irs.gov, Zacks Investment Management “What Does the Election Mean for U.S. Markets?”
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