Richest Americans Win With a Divided U.S. Government
Wealthy Americans watching election results are breathing a sigh of relief, for now.
Advisers to the rich had been planning a variety of end-of-the-year strategies to protect their clients from big tax hikes in case former Vice President Joe Biden was elected president alongside wide Democratic majorities in both chambers of Congress — a “blue wave” that doesn’t seem to be materializing.
While Biden appears to be leading in the states he would need to take the White House, many are expecting the Senate to remain in Republican hands.
“There was anxiety that there would be a Democratic sweep and a quick change in tax law,” said Laura Zwicker, chair of the private client services group at the law firm Greenberg Glusker in Los Angeles. “There is now a little more time, a little more breathing room.”
If President Donald Trump wins reelection, the status quo is also likely to persist. While he has mentioned cutting taxes on capital gains in his second term, a House of Representatives that remains in Democratic control would almost certainly block that proposal, which would overwhelmingly benefit the wealthy.
Rich taxpayers aren’t out of the woods yet. Senate control might not be settled until January, when Georgia is scheduled to hold at least one, possibly two, runoff elections.
Even if Republicans hold the Senate, the U.S. is plagued by huge deficits that could raise pressure on lawmakers to raise revenue. The wealthy also face the prospects of tax increases on the state and local level, as governments fill budget holes created by the Covid-19 pandemic.
Biden, as president, could also try to convince Congress to give the Internal Revenue Service more funding and boost enforcement. The IRS’s audit rate has plunged to 0.03% of taxpayers earning $10 million or more in 2018.
“The worry is always there, but we believe it’s diminished,” said Kenneth Van Leeuwen, managing director and founder of Van Leeuwen & Company, a firm in Princeton, New Jersey, advising high net worth individuals. With government likely divided between the parties no matter how the vote count goes, he said, “I think we actually won, regardless of who wins.”
Divided government may end up continuing a “perfect time” for rich Americans to pass on wealth to heirs tax-free, said Marya Robben, an estate planning attorney at Lathrop GPM in Minneapolis.
The estate and gift tax has never been easier to avoid, thanks to the tax law passed by Republicans and signed by Trump in 2017. Low interest rates also make it an ideal time for wealthy Americans to hand off fortunes to the next generation.
Because it’s such a favorable environment anyway, advisers say they’re still encouraging many of their clients to go forward with wealth transfers that were planned before the election.
Election results “might cause some people to slow down on their year-end planning,” Robben said. But, “everybody who is already at the the table will probably see it through.”
Even if Republicans block all tax legislation, a President Biden could still do some things as president to boost revenue from the top 0.1% without Congressional approval. For example, he could use regulations to target loopholes or otherwise tighten rules on the wealthy and corporations. That could include reviving regulations, put on hold by Trump when he took office, that would have stopped the wealthy from transferring assets to family members at low valuations.
Still, any changes by regulation would raise relatively little revenue. And the wealthy would probably have plenty of warning of any changes, giving them time to take evasive action.
In a narrowly divided Congress, any deal to raise taxes is also less likely to sneak up on rich Americans, by being applied retroactively to the beginning of 2021.
“It’s going to be a long messy process that’s going to have a lot of compromises in it,” Zwicker said. “We are going to have warning.”
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