It Started: My Thoughts On The Joe Biden Tax Plan

What's up guys? It's Graham here. So normally, I don't make videos like this, and I try to stay away from topics that could be taken out of context or politicized. But lately, there's been a lot of talk about a brand new tax plan that would soon increase the tax brackets, expand the definition of income to include unrealized capital gains, and create a minimum wealth tax on incomes above a certain amount.

That's why it's incredibly important to understand the taxes being proposed, how this could change the landscape of investing, why this is about to soon become such a big deal, and how your own finances will be changed after all of this is said and done. Because I know taxes are not the most exciting topic out there, and it's not like you woke up this morning thinking, "Oh, I can't wait to watch a video about taxes today."

But it's so important to learn this because just understanding the basics could easily save you thousands or even tens of thousands of dollars in the future, if not more. Although, before we start, it would mean a lot if you tapped that like button for the YouTube algorithm by giving it a gentle tap. Doing that takes a split second, it helps me out a ton, and if I see a video like this do well, I'll make more like it in the future. So thank you guys so much.

Now, with that said, let's begin. All right, so to start is a super quick 60-second background. In 2017, a new tax plan called the Tax Cuts and Jobs Act went into effect, and that was a huge tax cut across the board for a lot of people. Tax brackets in every single income range were lowered. The standard deduction was increased, certain business expenses were 100% tax-deductible, and the corporate income tax rate was reduced from 35% to all the way down to 21%.

Under this new tax reform, some people got some mega crazy write-offs and saved a lot of money, while other people saw no difference at all, and certain people saw a tax increase depending on their situation. Anyway, it's important for me to mention this because, in any tax bill, there are going to be winners and losers, no matter what you do. Some will benefit more than others; some will like it, some will not, and it's impossible to please everybody.

So with that out of the way, here's the new proposed tax plan and how it's going to impact you. All right, so first, this proposal aims to increase the corporate tax rate from 21% as it is now up to 28%. See, initially, it was thought that if you lowered the corporate income tax rates, more companies would move their infrastructure back to the U.S. They'd be more likely to reinvest back into infrastructure, they would hire more employees, and that would be good for the economy.

But even though more corporate money did end up moving back to the U.S., many economists argued that that extra money saved mostly fueled stock buybacks, which boosted up the stock prices, which is good for investors, but not so good necessarily for everybody else. Now, if the tax rate gets increased to 28%, it's unclear whether or not that higher cost is going to get passed on to consumers in the form of higher prices or if stock buybacks and corporate profits will decrease, which might impact the future growth of the stock market.

It's still too early to tell, although the Tax Foundation did put together a very unique analysis that I think is worth discussing. They estimated that a 28% tax rate would reduce GDP by 0.7%, or 160 billion dollars. Stock and wages would marginally decline, and 138,000 full-time jobs would be lost. Thankfully, they estimated the loss would be gradual, but it could amount to a GDP decline of nearly 720 billion dollars over 10 years, which is larger than the 694 billion of tax revenue that would be generated in its place.

As a result, they believed that long-term, a higher corporate tax rate would result in incomes dropping by one and a half to two percent. On top of that, another study found that increasing the corporate tax rate was the most harmful for growth, suggesting instead that we tax consumption or recurring tax on movable property, which is another way of saying higher real estate taxes.

The overall, as far as what I think about this, is an armchair economist on YouTube who has a weird fascination with taxes. From everything that I could see, a 28% corporate tax rate is probably not the most effective at generating more revenue, but it's still a lot lower than it used to be, and it can absolutely be worse.

Although, as far as what else is mentioned, this next one is by far the most controversial that everyone is talking about, and it's called the billionaire tax. Now, even though technically you don't have to be a billionaire to be affected by this, this one is stirring up a lot of controversy because it does something that has never been done before, and that would be taxing unrealized capital gains.

Like, just consider this: let's just say you make a thousand dollar investment, and over time it grows to five thousand dollars. In that case, you don't owe any tax because you haven't locked in that profit and realized those gains by selling. I would venture to say that almost everybody watching has some type of unrealized gain in one way or another, whether that be in stocks, a home that's worth more than you paid, or interest in a business that's just grown in value as it is right now.

All of those gains are not taxed until you actually lock it in and sell because, as I'm sure you've seen, a lot could happen on a moment-to-moment basis that could change those values. In this case, however, they want to tax the unrealized gain on those making more than a hundred million dollars who don't pay a minimum 20% tax on their income, which suddenly starts to get a lot more difficult to implement.

See, all of this begins with the narrative that billionaires pay a lower tax rate than their secretary, and to a large extent, that's true. Most billionaires don't get there by working a salary, but instead, their worth is tied up in the stock of their business, of which a controlling interest makes them a lot of money on paper.

In this case, if their business does well, the stock goes up in price, and they're able to grow a lot of wealth completely tax-free without ever needing to sell anything. Although in addition to that, there's also the grunt criticism that the long-term capital gains tax rate is lower than that of an earned wage, and as someone who's pretty open-minded to all things money, I have to say it makes sense, and there's a good reason behind it.

See, as it is right now, the tax code differentiates between earned income and investment income. Earned income from a job, payroll, or manual labor is subject to payroll tax, Medicare tax, Social Security tax, and to federal income tax as high as 37% depending on how much money you make. On the other hand, investment income is taxed at a flat 0% to 20% depending on your income bracket, regardless of how much you make, which kind of seems weird because income is income, right?

Well, not really. When you invest your money, not only are you putting your capital at risk, but you also lose purchasing power each and every year to inflation, and that inflation adds up. Like, just consider that had you made a hundred thousand dollar investment in 1922 that only increases at the same rate of inflation, you would have one million six hundred and eighty-eight thousand dollars in today's money, of which if you sold would be subject to a twenty percent capital gains tax, leaving you with less purchasing power today than what you started out with in 1922.

That's why the government wants to incentivize people to invest long term, with money that gets redeployed back into businesses that leads to more economic growth, with, of course, a lower tax rate. Not to mention, unlike a job, investment income is not guaranteed, and there's a chance you might also lose money, so in a way, taxes have to be lowered to compensate for that.

But let's just assume this passes and capital gains are taxed regardless of whether or not you sold. What would happen? One, it sets the precedent that unrealized capital gains could be taxed, which some argue is unconstitutional. For example, the Constitution denies Congress the power to levy a direct tax unless it's apportioned among the several states in proportion to the population. Not to mention, in 1920, the U.S. Supreme Court concluded that under the 16th Amendment, there must be some actual transfer of rights before Congress can tax appreciation as income.

So from the very get-go, this would be highly unlikely to pass. Two, it would force business owners, who might not have the cash liquidity to pay the tax bill, to sell off a portion of their ownership and potentially lose control of their company or send the stock price falling as more shares enter the market. Just consider the case where someone builds up their company to 500 million dollars, takes absolutely no money for themselves for the sake of growth, but has to sell a hundred million dollars of their stock to satisfy a tax bill of which they had no intention of ever selling.

That could lead to market instability, price swings throughout thinly traded companies, and new ownership if the stock price suddenly rises too high. And three, it sets a dangerous precedent that unrealized capital gains can be taxed. That threshold could become an arbitrary number that changes over time. After all, who's to say they won't eventually lower it to 50 million dollars, 10 million dollars, or one million dollars, and then eventually everyone pays some sort of unrealized capital gains tax depending on how well they do?

But realistically, regardless of what you think of this proposal, the chance of this actually passing is pretty much not going to happen. Although there are other points in this bill which do have a good chance of passing, including a top individual tax rate of 39.6%. So that would mean a tax increase of 2,600 dollars for every one hundred thousand dollars earned above that amount.

Of course, there are other tax increases within this as well, from repealing the 1031 exchange if you have more than five hundred thousand dollars in profit, getting rid of oil and drilling tax deductions, considering coal royalties to be income versus a capital gain, modifying estate and gift rules, and about 30 other increases throughout 120 pages of text that takes way too long to read through.

It also includes a clause for cryptocurrency by extending the taxation of unrealized gains to apply to digital assets and using some of those funds to fight the misuse of cryptocurrency. First, I think the chances of this actually passing are fairly slim, at least in the way it's currently structured. I think most of these proposals are simply a way of saying, "Hey guys, at least we tried," knowing that it'll be a constant battle back and forth through Congress and likely winding up with only a small fraction of what was first requested.

Now, from a practicality standpoint, actually enforcing these new regulations would require a constant and sustained effort from the IRS, of which they are drastically understaffed and need to be brought up to 2022 standards. For example, they need more people, they need a better e-filing process, they need to be more streamlined, and I'm constantly in awe that they don't have the best technology to service all the people who need them.

Second, what most people don't know is that the Tax Cuts and Jobs Act is already set to expire at the end of 2025. So in three more years, if nothing else is done, we'll eventually return back to higher corporate income tax rates, higher tax brackets, and lower deductions anyway.

Now, realistically, by the time that happens, it'll either be extended or something else will be put in its place. But the current tax code is not meant to last indefinitely, and it will change in one way or another. The third, I'm not against paying higher taxes if the money is put to a good purpose.

For example, it's no surprise that the IRS needs more funding, and the fact that only three percent of calls get answered is a huge problem. I've had numerous instances where documents are lost, information gets too long to be updated in their system, or refunds take months to process versus days or weeks. Obviously, I get it; they're understaffed, and there's no way to service everybody, but that's where the money should be prioritized because what's the point of paying higher taxes if there's no one at the IRS to help the people who have questions?

Personally, I would fully support a higher income tax rate, a progressive tax rate on capital gains above a certain threshold, and a slightly higher corporate income tax rate. I don't think it'll be the end of the world, and after a certain point, I don't believe anyone will even notice. But realistically, as far as what we have in front of us, it's probably not going to pass.

It's going to create a logistical nightmare for the IRS to actually enforce, and it's going to create a lot of pushback between the House and Senate. So I hope this explains what's going on for anyone curious and why we're most likely going to see something entirely different than these 120 pages that have just been presented to us.

By the way, if you guys want a weekly recap into all three of my videos that I post along with all the extra information that I researched, the link is down below in the description. It's totally free, so if you guys want to join, the link is there.