How Biden’s Tax Plan Will Affect You
When I was a young boy, my rich dad told me, “You can make a lot of money and still not be rich.”
By this, he meant that you could have high income but also low financial intelligence. Many high earners lose their money to two things, expensive liabilities—like fancy cars, long vacations, and McMansions—and taxes.
Back in 2010, I wrote about a Fortune Magazine article entitled “Why the ‘rich’ aren’t feeling so rich”. The article covered the term it’s author had coined, “HENRY”, which stands for “High Earners, Not Rich Yet.”
As I wrote then, “What Tully is getting at is that those we’d consider rich because they make a lot of money, such as doctors and lawyers making $250,000 to $500,000, aren’t really rich at all.”
As it stands today, these high-paid employees pay the most in taxes, with effective rates between 33% to 39.6% from roughly $191,000 to $418,000 a year in earned income. And unfortunately for these high-earning employees, there isn’t much they can do to find relief, aside from a mortgage deduction and family credits.
Some people find this to be incredibly unfair. Why should you pay higher taxes simply because you make more money?
Depending on where you land on the political spectrum, you’ll most like have passionate arguments for – or against – the idea of taxing the rich.
A simple truth about taxes
Tax breaks are rewarded to the rich who build the economy and provide jobs. But that’s an inconvenient truth no one likes to hear.
Rather than talk about whether the tax code is fair or unfair, I propose that the discussion should be looked at through the lens of what I shared above. Given that, the question becomes less, “Is it fair to tax the rich?” and more, “Are high-income employees building the economy and providing jobs?”
The answer is, of course, no. While it’s true they may help build a company’s bottom line, and they may also do some hiring for that company, they are not personally building the economy or providing jobs. Their company is. They are just very high-paid (and high-taxed!) employees of that company.
Why paying $0 in taxes can be a good thing
Right before the November election, the New York Times printed the “surprise” news that President Donald Trump paid next to nothing in taxes—$750 to be exact. Of course, the liberal, far-left crazies are losing their collective mind over this news. Most people saw this and immediately rose up in righteous anger. That would be so unfair!
But it’s nothing new. Why would you expect them to understand how money and taxes work?
When this first came out I was compelled to write a blog in which I defended the fact that Trump may not have paid taxes. As I wrote then:
As you probably know, the tax codes in the US and in many different countries are long and complicated. The question is, why?
The reason is that government leaders learned a long time ago that the tax codes could be used to make people and businesses do what they want by utilizing the tax code.
In short, the many credits and breaks that are found in the tax code are there precisely because the government wants you to take advantage of them. For instance, the government wants cheap housing. Because of this, there are many tax credits for affordable housing that developers and investors can take advantage of that minimize their tax liability, put more money in their pocket, and in turn, create affordable housing. Everyone wins.
There are many scenarios like this in the tax code that incentivize investors and entrepreneurs to do activities the government is looking for while rewarding those who take those actions with a low or zero-tax burden.
Because of this, limiting your tax liability actually means you’re doing what the government wants you to do through the tax code. And that is the most patriotic thing you can do.
One of the reasons I supported Donald Trump as president was because I knew he understood how money actually works, including using the tax code to force the right behavior for the country.
How will Biden’s Tax Plan Differ?
Biden ran on the fact that “he’s going to raise the tax rate for the wealthy.” The truth is, Biden’s plan is actually going to decrease taxes for the wealthy in high tax states.
One example is Biden’s plan would reinstate the state and local tax (SALT) deduction. This deduction allows taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments.
Trump’s Tax Cuts and Jobs act capped this deduction at $10,000 which resulted in a 40% decline in deductions. Once this is reinstated, it’s limitless. When you eliminate the salt deduction, you benefit rich people.
Middle-class people, working-class people do not take the salt deduction. The vast majority of that deduction goes to rich people. So if you want to take wealth from rich people, you’re not going to put the salt deduction back in place. This is one example of how Biden’s “tax the rich” plan will actually backfire and end up hurting those making less than $400,000.
The reality is employees have little control over their money when it comes to taxes. They are at the full discretion of the law, which gives them very little wiggle room. Employees and high-income earners might be bitter or might be glad about their tax situation, but what is shared is a mindset that there is nothing you can do about it. After all, you can’t fight city hall, right?
How to Prepare for Biden’s Plan
Many people may find a reason to complain about this tax code. Rather than get mad, get smart. Employees and small business owners will be at the mercy of the Biden plan.
Figure out how you can be someone who either grows the economy or creates jobs…or both. By doing so you will benefit from the very behaviors the tax code is designed to reward. The economy and your wallet will be better off for it.
As my advisor on taxes simply states, if you are an investor President-elect Biden’s tax plan won’t affect you because investors will still use the tax code to do things the government wants you to do.
Kim and I will still invest in real estate and our business. We will go where the tax incentives are.
Editor, Rich Dad Poor Dad Daily