The White House won’t rule out a retroactive implementation of its sweeping new tax plan — and tax haters across Wall Street are in a panic.
The Biden administration has previously said levying taxes retroactively — which could stick taxpayers with jacked-up rates on transactions dating back to Jan. 1 instead of imposing them beginning next year — isn’t its “first choice” as it pushes a bold series of hikes on companies and the rich.
Nevertheless, it has refused to rule out the rare but not unprecedented move. In January, Mark Mazur, Treasury Department deputy assistant secretary for tax policy, said retroactive taxes could make sense if they were introduced early enough in the year.
“This is the No. 1 question I get from investors,” says James Lucier, managing director at Capital Alpha, a Washington-based policy research outfit. “Every meeting someone asks me about retroactive taxes. It is the hot-button concern.”
President Biden has floated a slew of taxes targeted at the financial industry and high earners, including raising the capital-gains tax — taxes paid on the value of investments — to as high as 43.4 percent from 23.8 percent on households making more than $1 million a year. He has likewise proposed hiking the corporate tax rate to 28 percent from 21 percent.
Now, people are “planning” and some are even “panicking” over the possibility that those rates could hit them for the 2021 tax year, according to Frank Agostino, founder and president of Agostino & Associates in Hackensack, NJ. The seasoned tax attorney says a number of clients have even sold homes in New York and New Jersey to move to states with no income taxes like Florida. Others have sold stocks and other assets to collect profits sooner rather than later.
“People are making stupid decisions based on their fears of paying more,” Agostino said. “Some have an almost religious objection.”
Retroactive taxes are legal and have been passed by Congress before. The first retroactive taxes were levied in World War I. As recently as 1993 they were part of a mid-year budget plan passed by President Clinton that targeted real estate and high earners. The law created upheaval at the time and faced legal challenges, but was upheld by the Supreme Court.
During his presidential campaign, Biden framed taxing the rich as a “moral issue” that would help level the playing field. In a speech earlier this month, Biden re-emphasized the sentiment saying, “I’m not anti-corporate, but it’s about time they start paying their fair share.” Biden has largely punted the nitty-gritty to Congress, saying the ultimate decision will be up to them.
The corporate tax hike, which will help fund Biden’s $2 trillion infrastructure plan focused on transportation, broadband and manufacturing, is seen as having the best chance of getting through. Policy watchers expect more clarity in late June when legislators will draft the first round of infrastructure legislation. Speaker of the House Nancy Pelosi has said she wants a bill passed by July 4.
“Because the White House hasn’t ruled out retroactive taxes, it is possible,” said Charles Myers of Signum Global Advisors. “I’d say 50-50 on corporate taxes being retroactive and 25 percent capital gains taxes are retroactive.”
Lucier is slightly more optimistic. He gives 20-percent odds on the new taxes being imposed retroactively to Jan 1., and an 80-percent chance they’ll be effective this coming January. That’s partly because he thinks that the bill won’t get passed before August — and most likely not until November — at which point it makes sense to just wait.
“You make capital gains so much harder to pass implementing it retroactively,” Lucier adds. “It would be adding insult to injury.”
In the meantime, Agostino says he’s providing clients with a menu of options ranging from transferring wealth to children to renouncing US citizenship. Some wealthy clients have already begun to sell stocks in anticipation of a possible retroactive tax — part of a strategy known as tax loss harvesting.
“This is what the best and brightest minds do,” Agostino said. “Sit around and figure out how to not pay taxes.”
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