Originally published on Forbes.com.
The prospect of President Bernie Sanders still seems like a heck of a long shot. For whatever it is worth there is polling that indicates that Bernie Sanders would win against Donald Trump. The best summary I’ve seen as to why a Sanders win is impossible is that this is a center-right country. When you travel in certain circles that is difficult to grasp. (Remember the joke about the college professor who could not figure out how Nixon won by a landslide, since everybody he knew voted for McGovern?) Still. Do we really think that the country was as far as left as it would ever be forty years ago and that there is no possibility of a crazy pendulum swing?
Anyway, I think there is enough to the contingency of the coming Sanders administration to think about what kind of a tax plan you might want to have in place in the event that that on January 20, 2017 Senator Sanders is sworn in as President. (See Note)
What Is The Tax Program?
I had a little trouble finding Bernie Sanders’s tax program in one convenient place so I wrote to the campaign. I heard back from Policy Director Warren Gunnels who indicated that the campaign is still working on a comprehensive tax reform plan, but he gave me a summary of what Senator Sanders has called for to date. The paper is titled “Real Tax Reform Means Making the Wealthy and Large Corporations Pay their Fair Share”. My main focus in looking at this is to see if there are any moves that high income/high net worth individuals should consider teeing up, so I will touch only lightly on some of the proposals.
The funniest thing about the tax proposals is that this candidate who is as far left as you can go without getting into Green Party territory is promoting a tax package that would pretty much bring us to the second half of the Reagan administration when it comes to income and estate tax.
Corporate Proposals
Senator Sanders would end rules that allow US corporations to defer paying federal income tax on profits of offshore subsidiaries. He would enact rules to prevent companies that are managed and controlled in the US from establishing themselves as foreign companies and would eliminate the tax benefit of inversion. He also wants to eliminate tax breaks for oil, gas and coal companies. He would also limit the way the foreign tax credits can be gamed.
Estate Tax
They lead off with a quote from a Republican President to give you a sense of where they are coming from:
The absence of effective state, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power, —- The really big fortune, the swollen fortune, by the mere fact of its size acquires qualities which differentiate it in kind as well as in degree from what is passed by men of relatively small means. Therefore, I believe in … a graduated inheritance tax on big fortunes, properly safeguarded against evasion and increasing rapidly in amount with the size of the estate.
I wish I could offer a prize to the first commentator to correctly identify that Republican President, but I’ll just let you all compete for the glory.
Sanders proposes that the estate tax kick in at $3.5 million with a rate of 40%, got to 50% over $10 million, 55% over $50 million with a 10% billionaire surtax. The document also talks about “closing loopholes”, but does not get real specific.
I think that this might be a good time to dust off the notion of forming a family limited partnership. If it is well executed it is an excellent method for separating management of wealth from its transfer. You could tee up a mega gift to make sure you use up the current exemption of $5.43 million in December 2016 while Sanders is still President-elect. There are a host of other techniques likes GRATS and QPRTs that you may have thought about doing someday. If it is something that you think was sound but have been procrastinating, you might take the Sanders surge as a prod to finally get it done.
Financial Transactions Tax
Under the proposal, trades would be taxed at a rate of 0.5 percent for stocks, 0.1 percent for bonds, and 0.005 percent for derivatives. This means, for example, that a trade of $1,000 in stocks would be subject to a tax of $5. A trade of $1,000 in swaps or other derivatives would be subject to a tax of five cents.
Whenever I have written about proposals like this in the past, I have gotten comments that any such move would have dire consequences for the economy. The funny thing about that is I know a lot of pretty conservative people who think that high volume trading is not good for the real economy. Personally, I tend to be agnostic on the issue. Regardless, I don’t see any planning opportunities here.
Social Security
This proposal is huge in my mind. They would apply the social security tax on incomes over $250,000 The current limit is $118,500. So it seems like there would be a tax-free bubble between $118,500 and $250,000. It’s hard to see the policy justification for the bubble, but that is neither here nor there. This change would cost Sanders main opponent Hillary Clinton well over $1,000,000 in self-employment tax on her self-employment income, mainly from speeches, of over $13,390,499. The current solution, not open to Hillary probably for political reasons, is to do what Newt Gingrich did and run your income through an S Corporation.
If you have thought about converting your business to an S Corporation and passed it by, you should probably think again. There is an immediate savings on the medicare tax, as long as you are not piggy about it and it would pay off big time if this change went through. Certainly if you are running a professional practice as a C corporation and bonusing everything out, you should really take another look. You probably should do that anyway, but here is an extra incentive.
Dividends And Capital Gains
Right now, the top marginal income tax for working is 39.6%, but the top tax rate on corporate dividends and capital gains is only 23.8%. Taxing capital gains and dividends the same way that we tax work would raise more than $500 billion over the next decade.
The change with dividends is big, but not applicable to that many people. My practical take-away from this is that if you have been putting off and putting off dealing with a C corporation that has greatly appreciated property, now might be the time to stop putting it off. Actually 1987 was the time, but no use crying about spilled milk. If the corporation does not have a lot of active income you need to blow out the earnings and profits in order to continue as an S corporation long enough to avoid double taxation on an asset sale. It may be cheaper to do that in 2015 or 2016 than it will ever be again.
Taxing capital gains as ordinary income is, of course huge. Is it premature to start thinking about not being so excited about deferring gains? I would go this far – If you have a transaction where deferral is elective – an installment sale or an involuntary conversion for example – plan on extending your 2015 return. If when the leaves are turning and the October 15th deadline is approaching, it seems like the country is “Feeling the Bern”, recognizing the gain in 2015 might seem like a bargain.
More aggressive moves can probably wait till December of 2016.
Nothing On Marginal Rates
I have seen things here and there where Sanders calls for much higher individual income tax rates. So when I started this project I was coming up with a lot of schemes to accelerate income and defer deductions but the summary from the campaign seems to just call for rolling the rate table back to what it was in 2000, which kicks in the top 39.6% rate at a lower level. If this is really shaping up to be a redo of the Tax Reform Act of 1986, maybe the top marginal rate will get scaled back a bit in exchange for eliminating the capital gains preference. So I’ll save my crazy schemes for another day.
No More Details Yet
I listened to the Sanders speech at the DNC on August 28 and did not note anything new
So if you are, like it or not, starting to feel the Bern, the things to look closely at right now are closely held C corporations and transfer taxes. In the mean-time, it looks to be an interesting election season coming up.
Note
In an earlier version I noted that Senator Sanders would be our first Jewish President. This is something that I thought of as a milestone worth remarking. When I was in the second grade we got our first Catholic President and it was a really big deal, particularly in parochial grammar schools. I also noted the composition of the Supreme Court.
I clearly pushed some buttons with what I thought of as an historical observation.