My Response To Paying Higher Taxes | Joe Biden Tax Explained

What's up, grandma's guys? Here. So normally I don't make videos like this, and I try to stay away from topics that might get taken out of context or politicized. But lately, it seems like there's been non-stop talk, fear, and disagreements about the plans to increase tax rates to levels not last seen since the 1920s, and how that could have a negative consequence on the market.

Honestly, it's easy to see why this is such a sensitive topic. Shortly after it was announced that a new increased tax plan would take shape this week, the markets reacted somewhat unexpectedly. The Dow instantly dropped 300 points, Bitcoin dropped below 50,000, and a wave of articles began to surface about how this would prompt the selling of nearly 200 billion dollars' worth of assets all at once prior to this going into effect.

But here's the thing. Even though this is meant to be a tax increase on individuals earning over four hundred thousand dollars a year, and it's easy to look at that and say, "Hey, you know what? It doesn't impact me. Why bother?" The reality is, no matter how much money you make or what you do for a living, this is going to impact you in one way or another.

So it's incredibly important to understand the taxes being proposed, how this could change the landscape of investing, and how your own finances could be changed after all of this is said and done. And of course, when it comes to topics like this, I don't get into politics, I don't take sides. I just look at the facts objectively, and that's it. That way, we could just entirely focus on what's important, like taxing a like button for the YouTube algorithm by making it turn blue. That's right, it's our duty as YouTubers to make sure you do your part in reducing the like button deficit by smashing it! And best of all, every like button is completely free and takes just a moment to help out the channel. So thank you guys so much!

And now, with that said, let's begin.

Alright, so we got to talk about the new proposal—exactly what this entails and why all of this is happening in the first place. Right now, there are two proposals in the works to help the American economy. The first one is the infrastructure package unveiled on March 31st at the cost of two trillion dollars over the next 10 years. This plan aims to revitalize transportation, water systems, and manufacturing, along with research and development for new job training.

The expectation is that by spending money now, that would create more jobs, boost economic activity, and that long term, that would be the benefit of everybody. But of course, speaking of the cost, coming up with two trillion dollars is not exactly free. In order to pay for this, a corporate tax rate hike was proposed that would increase the tax rate from 21, where it is today, and bump it up to 28, along with a minimum tax of 21 for any multinational corporation to make sure they don't just set up a headquarters in Ireland and then all of a sudden they own nothing.

The hope is that by implementing these changes, a corporate tax rate hike would generate an additional 2 trillion dollars of revenue over the next 10 years. So in theory, they could raise taxes and then use that money to reinvest back into the economy for a more thorough recovery. But before we talk about the implications of that and how that would impact you, let's talk about the second part of the spending proposal, which is the entire reason you clicked on this video to begin with.

That would be the increase in personal tax rates to help offset the cost of the American Families Plan, which is estimated to cost another 1.8 trillion dollars. This would help fund childcare, free community college, paid family and medical leave, expand the monthly childcare credit to 2025, and improve several other measures with the intention of helping families in need and furthering education within the economy.

Now, of course, like the first 1.8 trillion dollars doesn't just magically appear out of thin air, even though kind of in a way it does. But to help offset the ongoing expense, three key points were mentioned. First, they would raise the top marginal tax rate from 37 to 39.6, which is where it was anyway before the 2017 Tax Cuts Jobs Act. Second, they would also raise the capital gains tax rate on anyone making over a million dollars a year from 20 all the way up to 39.6. And finally, third, there will be an increase to enforcement within the IRS to make sure that all taxes are properly being collected.

But here's where things take a slightly different turn. Even though I get it, it's easy to say, "You know what? It doesn't impact me as long as I'm not the one paying for it. Just don't tax the rich, I'm okay with that." Well, like it or not, there are other implications to this that need to be considered, and this is what some people are warning might happen.

First, let's talk about the stock market because this would have a direct impact on the value of your investments and how much money you make. Now, it's no surprise that upon the announcement of a brand new capital gains tax, stocks immediately began selling off. And even though that wasn't a permanent drop, the question still remains: what would actually happen if this were to go into effect?

Well, the most obvious answer would be that wealthy investors would be highly incentivized to sell off all of their long-term capital gains prior to this going into effect, pay a lower capital gains rate up front, and then step up their tax basis for future profits. If that happens, analysts at Goldman Sachs found that the S&P 500 dropped an average of four percent ahead of a tax increase, and momentum stocks saw an average drop of almost 10 percent.

They also found that the last time the capital gains rate was increased in 2013, the wealthiest household sold one percent of their equity assets, which, if that holds true today, roughly 178 billion dollars would be sold off from the stock market in a relatively short period of time. It was also discovered that on average, the market recovered just six months after a tax hike going into effect, and from there, things just kept moving on as usual.

However, I hate to be a Debbie Downer, but here's the thing: that information was based on the 2013 capital gains tax hike which increased the capital gains rate from 15 to 20, which represents a total change of 33.3%. But today, the new proposal would increase that tax rate from 20 all the way up to almost 40, which represents a 100% increase in taxation, or three times higher than what we saw in 2013.

So those numbers could very well just be the beginning of what we actually see. Not to mention, in 2013, when this tax rate went into effect, we were just barely beginning to recover from the great financial crisis, and the markets had just barely begun to reach the same levels they were trading at at the peak of 2007. So chances are, the wealthy households did not have the same level of appreciation and profit that they're seeing today.

Now, as far as the long-term outlook of the stock market, that's where things start looking a little bit more hazy because it just depends on which data you look at. For example, according to LPL Financial, the S&P 500 gained an average of 1.4% in the three months before a new tax went into effect going all the way back to 1969. Then from there, stocks surged 6.4% during the following three months after it went into effect, with the overall market up 4.3% after that first year.

But unfortunately, that doesn't really give you an accurate picture because what they're not telling you is that the 2013 bull run skewed the average market performance by a lot, rising up 25% in price right after a major financial catastrophe. They also happened to have left out that the markets ended up dropping 30% by the end of 1987, and by 1968, the markets were also down 30%.

But to be fair, during those times, there was a lot more going on than just a tax increase, and it's really unclear how much of a factor increased taxes paid over the following 12 months. But either way, all of that is really just a fancy way of saying that tax increases only play a small component of how the stock market reacts, and in my opinion, a tax increase on its own is not enough to destroy the stock market.

But a tax increase in conjunction with other policies could be enough to sway investments from one asset class to another, and that could eventually come back on you, even though you don't make enough money to be impacted directly by these changes. For example, it is true that this tax increase would not directly impact 75% of stock owners. On top of that, it's also true that 99.7% of taxpayers don't make a million dollars a year to be impacted by any change to a capital gains tax.

So again, on the surface, almost all of you watching would not see a direct difference. But here's where it would have a higher likelihood of impacting you. First of all, it's important to realize that even though 99.7% of households won't be affected, that top one percent controls nearly 51% of the stock market and 38% of equity value. So there is very much an imbalance in terms of how much control that top one percent has in the markets. If they shift to their investments, it's inevitable that's going to have a ripple effect across the entire market.

And as someone who falls in that income category, here's what I think might happen. Number one, I think quite a few people might see less of a reason to invest in the stock market. Like I think one of the most attractive parts of investing long term is getting to take advantage of the long-term capital gains tax rate, which is a flat 20% if you're making about 400,000 a year. And what's even more impressive is that I just said all of that in one breath.

Now, the reasoning for this low tax rate to begin with is that so the government can incentivize you to hold your investment long term. The money you invest is already taxed up front to begin with, and each and every year the purchasing power of your money is degraded thanks to inflation. Not to mention, investment income is not guaranteed like the income you make from working a job, and there are plenty of risks associated with investing your money. So less tax here would encourage more overall investment for everybody.

But with a higher tax rate, investors are going to start thinking about the risk versus reward of the stock market. Like if you make over a million dollars a year and this goes through, you would be paying a 39.6% capital gains tax rate, a 3.8% investment surtax, and a state tax rate as high as 13.3%. So when all this is said and done, you could be looking at the lowest tax rate of 43.4% if you happen to live in a state with no state income tax, or as high as 56.7% if you happen to live in either California or New York.

And I gotta say, when you're responsible for taking on a hundred percent of the risk but you only get to keep slightly more than fifty percent of the upside, it skews your investment decisions into other alternative asset classes that might end up giving you a more balanced return.

For example, real estate would offer consistent depreciation against the rental income generated, and for me, that would be a superior investment over the stock market. Second, I think we would also see less money invested in startup companies or other businesses that need to raise money in order to grow. Like when I invest in a company like this, I take the risk of tying up my money potentially for decades without having any access to it at all.

I also take the very high risk that that investment could be worth nothing in the future, and I calculate that risk into the likelihood that I could do really well in the future while enjoying a long-term capital gains tax rate. And I'll be honest, I feel that quite a few investors would be less likely to take that risk if they felt their upside is capped at the same tax rate as they pay on ordinary income that's guaranteed.

If that happens, fewer companies get funding, and there's less of a push for innovation that otherwise would have existed. This also has the chance of falling back on business owners who don't make a million dollars a year, but perhaps they've spent their entire lives building up a company from the ground up, refusing to sell it, never taking a salary beyond the bare essentials, only to one day sell it for three million dollars and have to give half of it back because they happen to sell it all at once, triggering the highest possible tax bracket.

Third, I also think we're going to see a big push towards the Roth IRA, which allows you to invest your money after paying tax, and then all the profit you make within the account is completely tax-free after the age of 59 and a half. Now this one is not really a huge change from today, and the Roth IRA has been around for quite some time, but I think we're going to see a lot of people take advantage of the mega backdoor Roth IRA contributions, self-directed Roth accounts, and anything else that would avoid more tax in retirement.

And fourth, we're probably gonna have a portion of investors trying to find a way around this or patiently wait for this provision to expire before they go and sell. For example, capital gains is only taxed when you sell, but what if you don't sell and just take out a loan against your investments instead? Well, in that case, you just go and spend the loan, you pay a few percent in interest, and that's a lot cheaper than going and paying 40% to 50% up front.

We might also see people restructuring their incomes to defer it into future years and then cash out capital gains during low income times or finding other ways to reduce their taxable income on paper so that that way they can go and sell off their investments. Now I'm sure this is only going to impact the small portion of investors, and most people are not going to go out of their way to try to avoid it. But a lot of times, money could do some crazy things.

But okay, fine. We get that. I'm sure what you want to know is how does this impact you if you don't make above 400,000 a year and all you do is just go and invest in an S&P 500 index fund and that's it? Well, according to the Tax Foundation, increasing the corporate income tax would reduce the long-run economic output by 0.8%. It would eliminate 159,000 jobs and reduce wages by 0.7%. The bottom 20% of workers would have it slightly worse than the average, seeing an average wage reduction of 1.45% after tax.

The reason for this, in theory, is that it would reduce the incentive to invest in the United States, and that in turn would lead to lower growth. But here's the thing: even if we do see a decrease in take-home pay, there is something to be said about paying towards an economy where everyone has a chance to participate and benefit. Like I would gladly pay 10% more in taxes if that meant we would actually have proper health care services, proper mental health facilities, and roads that don't have potholes.

Although we do have to take a close look at the amount of spending proposed, where it's going, and how much is actually generated by such measures. Like right now, if all the changes currently went into effect, it would generate a dynamic revenue of 2.78 trillion dollars over the next 10 years. That's an average of 278 billion dollars a year during a time where in 2019 the government spent 4.4 trillion dollars of its 21 trillion dollar GDP. We also have a 27 trillion dollar national debt, which means this tax increase is only enough to cover 1/100th of it per year.

Sure, you could certainly argue that the U.S. owes a lot of that debt to itself; it's about on par with what the GDP is, and it makes sense to keep that debt when interest rates are so low and inflation will eventually make that worth less. But the fact remains that there is so much spending that even a tax increase barely makes a noticeable difference.

So from here on out, it really becomes a delicate balance of how much do we want to reinvest back into our economy, how much do we want to tax our workers, and how much do we want to incentivize new business? But instead, we have to face the reality that not everyone is going to comply. Certain investments will be favored over others, and the wealthy will probably still be wealthy.

So taking all of that into consideration, here are my thoughts. Increasing the corporate tax rate is going to encourage businesses to reduce their taxable profits through either inefficient spending or reinvestment back into the company, which I gotta say is probably a mixed bag of results. On the one hand, larger companies would have the resources to potentially move offshore or restructure their income in such a way to avoid the tax. But on the other hand, this might encourage more innovation and growth because companies would rather reinvest back into the business than have to spend the money back on taxes.

So I gotta say, this one could end up going either way. Second, I'm not really sure why this is such a shock to the markets. This plan was announced back in November, and it's been discussed extensively throughout every single news network six months ago. So none of this should come as a surprise at all. So unless the stock market just entirely forgot this is going to happen, I thought the sell-off was a major overreaction.

The third, I could be wrong, but I feel like this is more of a negotiation tactic, and the likelihood of this passing as is is relatively slim. This is probably more of an opportunity to start high and then settle somewhere in between, but who knows? Like I said, I could be wrong, and I don't know what I'm talking about.

The fourth, speaking of the tax increases, what a lot of people forget is that the Tax Cuts and Jobs Act in 2017, which lowered the tax rate to begin with, is already set to expire by 2026. So by changing and increasing the tax rate back a few years earlier, it's not that big of a change in the big picture. The biggest change from all of this would be the increase in capital gains tax for people making over a million dollars a year, which doesn't make a lot of sense to me to begin with when capital gains is taxed at a higher rate than earned income.

Instead, I would much rather see a progressive capital gains tax rate in terms of how long you've held your investment for. Maybe, perhaps, now it'll take three to five years to realize that lowest capital gains tax rate instead of the one year like it is today. That way, long-term growth can stay intact, but short-term positions will be taxed slightly higher. Or perhaps there could be a compromise to a 28% long-term capital gains tax rate.

I have a feeling that something like that will be more of a reality, but again, we'll wait and see. But overall, like I said, I do believe that reinvesting back into our economy is a good thing. I think there's absolutely programs and services out there that are deserving of more funds, and what we do now is going to have a positive impact in the future.

But I would expect that what we're seeing from this proposal is probably not going to be the final thing that's actually passed. Even though I think that long term, it's inevitable the tax rates are probably going to be going up for everybody. I hope this clears up some confusion for anyone wanting the real numbers behind this, and then from there, you could make the decision for yourself as to whether or not this is too high or too low.

Let me know your thoughts on this in the comments. I read pretty much every comment that's posted, so chances are if you go and write something, I will take it into consideration. As of now, the best thing that we could do is to continue educating ourselves and, for the most part, just wait and see what happens, as well as smash the like button for the YouTube algorithm.

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