Transcript:
Easan Arulanantham:
“So you talked about the Build Back Better Plan. So, I know the proposal, the tax proposals are changing each week. Can you give kind of like a summary of what’s on the table right now?”
Tom Vaughan:
Yeah, actually, it’s really kind of interesting. And of course, keep in mind that what’s on the table right now might be different than we talked about this again next week. It seems like we’ve been talking about this every week. And against because it comes up as questions. I think it is important to have some idea for what’s happening, so that you could at least think about, in advance, some of the strategies that you might use. So for example, at one point in time, they were talking about essentially eliminating for the most part, Roth conversions by the end of the year. That’s off the table right now. So that’s not going to change. Which I think is great, because I still think that’s a very powerful tool for some people to use. They were also talking about getting rid of “stepped up basis.” So if you bought a house for $160,000, that’s now worth 2 million, some crazy number, like we’ve seen here in this valley. And you pass away, right now, your kids would get a stepped up basis. So they would get a $2 million basis, which just means if they sold it, they’d have no capital gains. And if they got rid of the step up, then that means that they would inherit your basis at $160,000, then if they sell it, so it’s a huge deal. Especially a big deal for like big farms and things like that, where it’s super difficult to deal with, without a step up. So that’s gone, too. They got rid of the corporate tax increase. They got rid of the capital gains tax increase. They got rid of the increase on the top bracket. Top bracket right now is 37%. They wanted to move that to 39.6. That’s gone, okay? So those are all gone. So what did they add?
Well, what they’ve got is that they’ve got a 15%, essentially minimum tax on companies that have more than a billion dollars of profit. So one of the problems we’ve seen is that some of these really big companies are able to use so many write offs, that they’re not paying really any tax. Even though the corporate tax is 21%, they’re ending up with next to zero. And so what they’re saying is that you’d have at least a 15% tax only for really big companies, and so they’re expecting to get some revenues from that. We’ll see how that works out. Then the second thing is, they’re going to tax stock buybacks. Like Apple, I think they buy $100 billion a quarter of stock and are taking it off. And that’s, you know, from a financial engineering standpoint, one of the things that happens, stock buybacks is, you know, you’re shrinking the supply. If the demand stays the same for your stock, the stock can go up, and so they keep buying it back. They’re now talking about a 1% tax on those buybacks. I don’t think that’ll be enough tax to stop these guys from doing it. Because when you look at the financial engineering portion of it, I still think the buybacks will happen. And yet, it’ll generate some income, so that’s not terrible. Then they’re talking about that if you make $10 million of revenue or more, you will pay an additional 5% tax on the revenue above that. And if you make 25 million or more, you pay another 3%. So total of 8%, on incomes above that. So they’re going after very big earning situations in far as that goes.
And so, you know, again, I don’t want to get political with all of this as to what they should be doing or not doing, what got cut out, what didn’t get cut out. But from a stock market standpoint, the adjustments that they’ve made, are good things for the stock market. They may not be good things all together depends on your opinions on what’s out there, but altogether, what we’re seeing right now, is kind of fascinating what they’ve settled on. Again, we’ll see you know that for a while they batted around this billionaire tax, where they would tax your unrealized capital gains. I think that’s kind of a nightmare, because you’ve got something that you haven’t sold, and you got to pay tax on it, how would you get the tax other than now selling some? And if that’s a big family farm or something, good luck with that. So again, I think that, you know, maybe that was cancelled, for good reason, possibly. I think what they’ve got right now seems kind of reasonable. We’ll see how it actually works out as far as that goes. But very, very interesting how that’s played out. Because we went from, you know, all of this talk about things that we might be doing for capital gains. I mean, if they increase capital gains nearly 40%, when you might want to sell your house sooner and later, you know, that kind of stuff. Now, it’s no change. So that that helps. I think that’s better.
Easan Arulanantham:
Yeah, my big issue with the unrealized gains is it kind of… it’s weird, if you’re like, if you’re a billionaire that inherited a billion dollars, then you have that stepped up basis, so you don’t have to pay taxes on it, versus someone that maybe made a company that is a billion dollar company, and they have so it’s kind of interesting how “unrealized” changes the thing.
Tom Vaughan:
Oh, it’s really fascinating, too, because they’re actually talking about not just like, going forward. So if I had a billion and it was worth 1.1 billion, I would pay taxes on that growth. So, that’s okay. I get it. But they’re also saying that we’re going to go backwards. Look at that first billion and or 10 billion or 20 billion, whatever it is, and then we’re going to tax you going backwards for the cost basis. So if your cost basis was 1 billion and you had 10 billion, you’re going to pay taxes on that $9 billion, then we’re going to spread that tax over nine years. And again, it’s hard to sympathize with billionaires, as far as that goes. But it just seemed really sloppy to me in a very strange, strange way. What they’re doing now, a taxing high income, that’s much easier. Because valuing things can be difficult too. It’s one thing to go to somebody, who has just publicly held stock, but what if it’s privately held stock? Or what if it’s a farm, and, you know, what’s it actually worth?
…And then if there was a decrease in gains, you would actually get money back. You would get a write off. And so we had a massive downturn in the stock market, for example. All of a sudden, all of these billionaires were getting massive write offs, which at a time when the government’s actually trying to collect more money, because usually you have more going out in those downturns, they’re going to be collecting less money. But again, I just didn’t think it made sense in totality for what they’re trying to do there. I like better what they’re doing. I especially like this minimum tax. What we’re starting to see now is that trying to get this global, essentially minimum tax in place, this 15%. I think that is, you know, the writing’s on the wall there, I think that could be a good thing as a whole. Try to keep that as a more even playing field. So anyway. …It’s hard to blame companies for trying to maximize what they’re doing and pay the least amount of taxes they can, but at the same time, it would be nice if everybody can kind of pay some share. So we’ll see how that works out.