With Joe Biden assuming the presidency and Democrats controlling both chambers of Congress, the United States entered 2021 with the potential for a significant change in tax policy.
The precise legislative outcome remained uncertain. Nevertheless, the direction of travel was already apparent from the Biden campaign’s published tax proposals.
Those proposals included increasing the top individual income-tax rate from 37% to 39.6% for higher earners, taxing long-term capital gains and qualified dividends at ordinary income-tax rates for individuals earning more than $1 million, increasing the federal corporate income-tax rate from 21% to 28%, and restoring elements of the estate and gift tax regime.
These were proposals rather than enacted law. But for wealthy individuals and businesses, the distinction between what is law today and what policymakers are actively seeking to change can be strategically important.
The Implications for Wealth
Tax policy affects much more than the amount of tax paid in a particular year.
It influences where people live, where companies invest, how assets are structured and whether capital is retained, distributed or moved elsewhere.
A higher tax on capital gains, for example, can affect the timing of asset sales. Higher corporate taxation can influence investment and business-location decisions. Changes to estate taxation can alter long-term succession planning.
The Tax Foundation’s analysis of Biden’s campaign proposals estimated that the combination of the proposed measures would reduce the long-run capital stock and economic output, while increasing federal tax revenues.
Whether one agrees with those estimates or not, the broader point is important: tax policy changes economic incentives.
Wealth Preservation Becomes More Important
For high-net-worth individuals, the coming years were therefore likely to make wealth preservation and tax structuring increasingly important.
This does not necessarily mean moving assets or changing residence immediately. It means understanding the alternatives before circumstances require a decision.
Residence, citizenship, corporate structures, investment vehicles and succession arrangements can all have significant tax consequences.
The question for internationally mobile wealth is increasingly not simply, “How much tax will I pay?”
It is also:
Where should I live?
Where should my assets be held?
Where should my businesses operate?
And which jurisdiction provides the greatest long-term certainty?
These considerations were already becoming more important, as discussed in US Ends UBO Privacy, where the broader movement toward greater financial transparency was examined.
The Corporate Dimension
Businesses also faced a potentially significant change.
The Biden campaign proposed raising the federal corporate income-tax rate from 21% to 28%. The Tax Foundation estimated that, when combined with state taxes, this would produce a U.S. corporate tax burden materially above the existing level and potentially make the United States less competitive internationally.
Corporate taxation matters beyond the corporation itself.
Higher corporate taxes can affect investment returns, shareholder distributions, business valuations and the attractiveness of different jurisdictions for new investment.
For multinational businesses, the issue is even broader because tax competition exists across national borders.
A Global Trend
The United States is not operating in isolation.
Governments around the world were confronting enormous fiscal pressures following the COVID-19 crisis. At the same time, many were reconsidering how much revenue could be raised from businesses, investors and higher-income individuals.
That creates the possibility of a broader international movement toward higher taxation.
The United States has considerable influence over global economic policy. Changes in Washington can therefore become a reference point for policymakers elsewhere, particularly where governments are looking for additional revenue.
This was already apparent in the international debate over corporate taxation and the search for a more coordinated global tax framework.
The result could be a period in which tax competition becomes increasingly important rather than less.
Tax Residence and Relocation
For wealthy individuals, this makes residence planning particularly relevant.
A person with substantial international assets may have considerably more flexibility than an ordinary taxpayer to change where he or she lives and where economic activity is conducted.
That does not mean that every wealthy American will leave the United States because of higher taxes.
But the possibility of relocation becomes economically relevant when the difference between jurisdictions becomes sufficiently large.
The principle is clear: taxation, regulation and monetary policy can collectively influence how wealthy individuals think about the preservation and geographical diversification of capital.
Looking Ahead
The Biden Administration had only just begun, and it was too early to know which proposals would ultimately become law.
But wealthy Americans should not wait for the final legislation before considering the implications.
Tax planning is most effective when undertaken before a transaction, relocation or restructuring occurs. Once legislation has changed, the available choices may be considerably narrower.
For internationally mobile individuals, the coming years therefore presented an opportunity to examine alternative residence jurisdictions, investment structures and wealth-preservation strategies.
The objective is not necessarily to leave the United States.
It is to ensure that alternatives exist if the tax environment changes materially.
US Taxes Set to Rise
The United States entered the Biden era facing enormous fiscal pressures and a new political willingness to reconsider taxation.
Higher individual taxes, higher capital-gains taxation, higher corporate taxes and changes to estate taxation were all part of the policy discussion already underway.
Whether every proposal would become law was uncertain.
What was considerably less uncertain was that tax policy was moving up the political agenda.
For wealthy Americans, that makes tax structuring, jurisdictional diversification and wealth preservation increasingly important considerations.
And if the United States begins moving toward a higher-tax environment, other governments may see an opportunity to follow.
The coming four years could therefore prove significant not only for American taxpayers, but for the global competition for capital and wealth.