Episode 90: Biden's Tax Plans Explained with Brian Riedl

Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright:

Welcome to the WealthAbility show, where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility. So Biden's massive tax and spending plan, oh my heavens, what do we make of it? Is it going to happen? How big of a change really is this, and is it really possible that we've got a $6 trillion spending plan in peacetime, a tax and spend?

Tom Wheelright:

So I'm very fortunate today, we are very fortunate today to have Brian Riedl from the Manhattan Institute. Brian has an amazing background. Brian, I'll let you share that with everybody. And we're just going to have a conversation about this plan, because I have my thoughts on it. And I'd like to hear Brian's thoughts, given Brian's extensive background in politics and legislation and tax policy. So Brian, welcome to the show and tell us a little bit about your background.

Brian Riedl:

Sure. Thanks for hosting me, Tom, and thanks to everyone for tuning in. So I'm currently at the Manhattan Institute, which is a libertarian think tank where I run budget and tax policy there. Before that I spent six years working in the Senate. I was chief economist to Senator Rob Portman from Ohio, and I was a subcommittee staff director for the Senate Finance Committee. Before that I spent 10 years running budget policy at the Heritage Foundation. Beyond those jobs, I've also dabbled in campaigns.

Brian Riedl:

In 2016 I was the budget and tax director for the Rubio presidential campaign. In 2012, I ran a budget policy and wrote the deficit reduction plan for Mitt Romney's presidential campaign, dabbled in a lot of other presidential campaigns as well. Unfortunately, none of them have won, but I've been working in DC tax and budget policy for about 20 years.

Tom Wheelright:

Thank you. And thanks so much, Brian, for being with us. We really need an expert in this. So let's start out, what do you think? What are your visceral reaction when you saw the green book come out, when you saw these ideas come out of the Biden … I mean, we knew they were coming the Biden campaign. Frankly, I never thought they'd actually be put into writing. So what are your thoughts?

Brian Riedl:

The amazing thing is the sheer enormity President Biden's proposals. You know, he ran more as a moderate and I guess compared to Bernie Sanders, sure, he's a moderate, but what he's put out is the most radically left wing budget proposal, at least since LBJ. To put it in context, the last presidential candidates on the Democratic side, going back 20 years, typically ran on one or $2 trillion in new spending over 10 years. Biden really adds up right now to $12 trillion in new spending over 10 years. If you add that up, the way I get that, we've already done a $2 trillion stimulus in March. He is proposing an additional $5 trillion in his budget from the American Jobs Plan and the American Families Plan, is infrastructure. And then there's an additional $5 trillion that's in the pipeline. This is things that came from the campaign or fake expirations in his budget that we're told to expect later.

Brian Riedl:

So you put all that together, you get $12 trillion in new spending over 10 years. Again, Obama, Hillary Clinton, John Kerry, they would premise one or 2 trillion. This is 12 trillion. And what's amazing about the 12 trillion, it is on top of a baseline of $11 trillion in deficits. So even if we do nothing, you get 11 trillion in deficits over the next 10 years. He wants to add $12 trillion in spending on top of that. The spending hike is so big that the $3 trillion tax hike he has, which would be the biggest tax hike since World War II, is barely even noticed, because it would only cover a quarter of the new spending. That's how big these numbers are.

Tom Wheelright:

All right. So I get a feeling how you feel about the deficit. So we'll get to that. And I look at just the tax policy here. We talk about effectively a 90% of estate tax, which is what we're looking at. We're looking at a tax on capital gains that we've never seen before, remembering that in '86, and I was in Washington DC in '86 and was following that legislation. I was working in the national office of Ernst and Young. Back then, when Reagan created his big tax change, remember there was no tax increase or decrease. There was no net budget effect on that. That was a revenue neutral bill. So what that meant was that at 15 and 28%, we were revenue neutral. So now we're looking at 40% with the same base, right? So it was clearly major tax hikes we've never seen before. My take is, and I want your feedback on this, Brian, this looks to me like the biggest change in tax policy since 1913, to me.

Brian Riedl:

It is an enormous change in tax policy. As you mentioned, the size of this, a lot of people say, well, the corporate tax was 35% and we already cut it to 21%. So President Biden pushing it up back towards 28, well, corporations are still going to pay a lower tax than they were before, but that's not true, because what we did in 2017 is we lowered the corporate rate, but we broadened the base. We closed a lot of loopholes. What President Biden is doing is saying, I'm going to raise the rate back up, but we're going to keep all the money from closing the loopholes as well. So what that means quantitatively is that in 2017, we cut corporate taxes by 300 billion. President Biden would raise corporate taxes by one and a half trillion.

Brian Riedl:

So corporations would get a tax hike five times bigger than the tax cut they got in 2017, because they're going to pocket all the base broadening and then put the higher rate back. Just the highest corporate rate in the world, once again, exactly what we were not doing before or what we were trying to get away from before. And as you mentioned, capital gains tax is going way up into the 40s, which is a level that a lot of people agree would actually lose revenue. A state tax is going through the roof. You get to the point where you're not even going to raise that much revenue because you get to the point where you stop economic activity. And so I think it's really self-defeating.

Tom Wheelright:

Well, of course, there's all this talk about, well, we need the rich to pay their fair share, which the rich now pay most of the taxes, so that's a non-starter to me. But the question I have is all right, so given that we've got this 3 trillion versus 12 trillion, so we're at 25%. Does that mean that necessarily, then it's really not going to be the rich who pay all these taxes, that this is absolutely going to come down to the middle-class. And then the next question is, how will it come down to the middle class?

Brian Riedl:

That's a great question. And I've been warning people about this for a long time. A couple of weeks ago, I testified before Congress on the infrastructure bill. And as part of my testimony, I added up every progressive tax increase. And I'm saying like, let's just pretend for the sake of argument, we do a 70% income tax rate. We pay social security taxes all the way up on all income. You give me this Bernie's 8% wealth tax, carbon tax, the estate tax, financial transactions, Wall Street tax. Let's say everything. You don't even balance the budget, much less pay for the $12 trillion in new spending that President Biden has promised. Even if you did the Bernie Sanders utopia, you couldn't even pay for the current spending we promised.

Tom Wheelright:

And that's even without the decrease in economic output.

Brian Riedl:

Oh, yeah, yeah, that assumes everyone's still works at these enormous tax rates. So even under the rosiest scenario, you can't even pay for the current spending with every progressive tax hike. So what does that mean? It means that if the Democrats are going to use up all of these new taxes for new spending, and you still have all this other spending coming and the baseline deficits, who is going to be left paying for all of that, the middle class. Just like year up finances, socialism by payroll taxes and value added taxes.

Brian Riedl:

Ultimately, once you've used up all the tax hikes on the rich, which they're going to use up very quickly, the middle class is going to be left holding the bag. My prediction is that 20 years from now, we're going to have significantly higher payroll taxes and a significant value added tax, essentially a national sales tax, because mathematically, there's no other way to make the numbers work, to pay for the level of spending they've proposed.

Tom Wheelright:

Right, I think something that a lot of people don't understand is that in Europe they have income tax rates that are about the same as ours, but they also have in France, a 22% value added tax. So we may have an 8% state sales tax, they got a 22% tax. Okay, now I'm actually a big fan of eliminating the corporate income tax and just putting a value added tax, just because I think that the value added tax, since we don't have one, I think it's a difficult situation for us versus the rest of the world. I just think it's a competitive issue. But the problem is is that you can't put in a value added tax because you'd never lose the income tax.

Brian Riedl:

Exactly.

Tom Wheelright:

That's always the problem, right? It's just too easy to just add it on, which I think is why it's never gotten traction in this country even, and that's why we got the tariffs and all that kind of stuff over the last several years, instead of the value added tax. So, okay, if the middle class is going to end up paying this, why is this not coming out? I mean, is the media so controlled by the left that it's not coming out? Or are we starting to see some of it come out? I see a little bit in the Wall Street Journal. Why isn't this being white? There seems to be some support for this. I can't quite understand why there's any support for this.

Brian Riedl:

I work with the reporters every day who report on this. And a lot of them, they do a very good job. They're very well-meaning, but I think a lot of them believe too much the Democratic talking points, that if only Bill Gates, Jeff Bezos and Amazon pay their fair share, we can pay for all of this. And I work with these reporters. I send them the tables. I send them the charts. I show them that you could seize every penny from millionaires. You could wipe out every penny from billionaires, you wouldn't come close to paying for all this.

Brian Riedl:

But they get so much mileage out of the rich aren't paying their fair share that they just don't do the math to figure it out. The other argument that I hear so often is, well, maybe we don't need to pay for it all. Maybe we can just … Interest rates are low, we'll just borrow forever. I've repeatedly tried to take down that argument, but people have this view of well, we're running deficits now, so what's the problem?

Tom Wheelright:

That's what we call magic money theory. Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine. He's a client of mine. He's a former board certified surgeon and he's turned into a real estate professional. So he has this podcast that is geared towards high paid professionals. That's who he's geared towards. So if you're a high paid professional, you're going look, I'd like to do something different with my money than what I'm doing. I'd like to get financially educated. I'd like to take control of my money and my life and my taxes. I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula podcast with Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

Tom Wheelright:

All right, so let's shift a little bit to this infrastructure bill, okay. So the Republicans seem to be going along with it. Two questions on this, the first is how is it going to get paid for? And the second is, is Biden sincere when he says, this is not coupled with the other, is he just going to say what he originally said, which usually what somebody says the first time is what they really mean. And that is that he's not going to sign this. And this is just a ruse. What do you think?

Brian Riedl:

Yeah. I mean, as background Biden proposed $4 trillion in infrastructure. Republicans said, we will give you the $600 billion in legitimate hard infrastructure, roads, bridges, electricity, water if you don't do the fake infrastructure. In fact, we'll help you pay for it. And then the Democrat said, okay, we'll do that 600 billion, but we're going to pass the other three and a half trillion in a reconciliation bill alongside of it, which means the Republicans basically got duped.

Brian Riedl:

Instead of actually paring down the cost of the package, they just split it up into two bills. And then they'll still get the entire 4 trillion. What Biden came back and said, okay, maybe I won't condition the two on them, if you just do the 600 bill, we'll do that. And then we'll see what happens with the other three and a half trillion. The two problems with that are number one, Nancy Pelosi is not on board with that.

Brian Riedl:

Nancy Pelosi has said either the two bills passed the House at the exact same time, or they do not pass it all. So as long as Nancy Pelosi is saying that, they're linked together. The other point is, even if they don't pass at the same time, even if they do the reconciliation bill two weeks later, I still don't understand what Republicans get out of the deal. If the whole point was to lower the package from 4 trillion to 600 billion, you need to get a guarantee that they're not going to pass the other three and a half trillion dollars in the side bill, whether it's at the same time, a week later, or a month later, otherwise they've gotten the entire 4 trillion. As for pay fors, they will tell you the $600 billion is paid for. I can tell you, having worked in the Senate and on budget negotiations for many years, it's a greatest hits of budget gimmicks. There is no real specifics. It's a lot of talking points. It's a lot of fees that always get waived later. It's not paid for, it's gimmicks.

Tom Wheelright:

So what do you think is going to happen?

Brian Riedl:

That's a good question. I think-

Tom Wheelright:

I mean, what the Democrats have been actually amazingly successful at getting everybody together. I mean, it's really been shocking to me that they'd get people like Joe Manchin and Kyrsten Sinema. They've been on board. Would you agree that something's going to pass in that budget reconciliation in October, November, something's going to pass. How big do you think it will be?

Brian Riedl:

I think the Democrats in reconciliation could probably pass between 500 billion and a trillion themselves in reconciliation. Manchin wants it paid for, I think Manchin may be willing to settle for gimmicks, because the Democrats can't pass real paid for. That's part of the fun. For all the $3 trillion in taxes the Democrats have talked up, in reality they don't actually have the votes even among themselves for most of them.

Brian Riedl:

A lot of this is a complete bluff, but I think Manchin might be willing to accept some gimmick pay fors that they could probably pass between 500 billion and a trillion by themselves. I don't think that Manchin is going to agree to the 2, 3 or $4 trillion. The question is, are Republicans going to participate and get run over? Or are they going to say, forget this. We're getting nothing out of this deal. We're going to run against it and not give you bipartisan cover.

Tom Wheelright:

Okay. So here's my take. I'd like your feedback on it. I think we'd probably get the 25% corporate tax rate, which Joe Manchin has said he's okay with. I think we'd probably get 25%. I hope we don't get the other guilty [inaudible 00:17:20] and the stuff I realize nobody on the call probably understands this, but those are actually big deals. And that's actually a lot more money. That's the base broadening that you were talking about. And I'm hoping that that doesn't happen, but I think we'll get the 25%. I think we'll get a raise in the top rate to 39.6%.

Tom Wheelright:

I actually don't think that hurts anybody that bad. My big question is, will we get any of the capital gains or the estate tax changed? Because I actually think it's the … Of course the capital gains tax change doesn't work unless you get the estate tax change. The capital gains at death and the capital gains at death is to me, we can't have possibly a worst tax policy, then both a capital gains tax and an estate tax.

Brian Riedl:

I agree with all of that. I mean, you're exactly right, that all the arguments we make on the estate tax and taxing capital gains at death contradict each other. You either tax capital gains at death or you their estate at death. You can't do both. And I also agree in terms of raising capital gains rates, the revenue maximizing rate of capital gains taxes is about 30, 32%. So if you're going to tax it at 39.6% for millionaires, you have to also tax it at death, because otherwise people will be able to move it out. And you're not going to raise as much money at that rate.

Brian Riedl:

In terms of corporate tax, I agree with you, the lowest hanging fruit for Democrats would be to raise the corporate rate from 21% to 25%. I think this would be a destructive policy because if you count state and local taxes, it's still going to be in the top third internationally, on the corporate rate. But I think that's one area where Manchin, I think, is willing to go to 25. I think a lot of corporations are mad about 25, but they're not nearly as mad on that as if they do some of the international stuff. And for national stuff. I know you said it's complicated.

Brian Riedl:

The easiest way I can explain the international stuff for those who aren't up to speed on it is what the President would ultimately do when all is said and done and you take into account all the policies, would it be a global minimum tax of about 26%, depending on how they handle deductions. And when you consider the fact that our trading partners are often at 19% or 20%, you have a situation where our subsidiary in England is paying 26%, while every other country subsidiary in England is paying the 19% English rate. That means that our companies are competing with one hand tied behind their back. You don't want a minimum tax higher than what the other countries are paying, or you're going to lose the global competition fight.

Tom Wheelright:

Well, here's the reality, right? You go back to Jack Benny, you can go as far back to Jack Benny and the personal holding company tax when it was 90%, it doesn't matter. I've been doing tax planning for 40 years, but the very wealthy are not going to pay these taxes. It's just not going to happen. You know what, the corporations can move. They can. A lot of the stock in the US corps are not owned by US citizens anyway. And so it's you all citizens, they can put a hold on that. Corporations, there's always something you can do. On top of that, the tax law, when it comes down to it, it's a series of incentives. And one of the things they're doing is just shifting the incentives, right?

Tom Wheelright:

For example, they eliminate the 10 31 like can exchange for real estate, but they leave in 368, which is the like kind exchange for stock. Right? So they're basically saying we don't like the small real estate guys, but we do like the big corporate guys. And one of the things that it's seemed to me out of this, and I'd love your to take on this, is that a lot of this is very anti small business and very pro big business. And I've wondered if some of that isn't, Biden's, how much he likes unions and the idea of unions and large companies. And he can't get them into small companies, but what's your thought? What do you guys think about this small … Because the capital gains taxes at death course is a huge hit on small business. Small business versus large business and who wins and who loses.

Brian Riedl:

Yeah, I think those are all good points. We've seen companies inverts. I mean the pretty much the entire beer industry has left America. And the more you do these global minimum taxes, the companies are just going to move their headquarters abroad and take a lot of the investment with them. And so it's totally self-defeating, because rich people and rich companies have resources and accountants and money is mobile and money goes where it's loved. In terms of the hitting small business harder than big business. I definitely noticed that again, big business can avoid a lot of these taxes. All businesses can't. The estate tax is always going to, is going to hit small business.

Brian Riedl:

Part of what's going on here is interesting because in the Biden infrastructure plan, he also has massive corporate welfare subsidies, hundreds of billions of dollars in corporate welfare, for Elon Musk, for electric cars, for companies that will undertake the R and D or the projects or the green energy that government wants. Basically what they're saying is we're going to tax you and then if you do what we want, we're going to give it back to you.

Tom Wheelright:

Well, they've always done that.

Brian Riedl:

Yeah. And most of this money is for big business. It's for big corporations. We will give you huge corporate welfare grants, if you do what we want. And I think what they're trying to do is they're trying to mold a lot of Fortune 500 companies into supporting their agenda, supporting their candidates, linking them up with government even more, so that you have to do what government wants and be nice to them. And then we'll write the check back to you. But if you're a small business owner, you're not writing big checks to candidates, you're not supporting their agenda, so they have less interest in that. They're just going to tax you and not even worry about giving you the money back later. I think there's a lot of politics at play there.

Tom Wheelright:

Yeah. That sure seems to be the way I'm seeing it unfold here. So final question, what do we do about it? So give us two or three things that practically … I know there's a lot of planning we could do right now. There's a ton of planning. We've been talking about that on the show, that now's the time to do it. It's an insurance policy, basically, in case some of this passes, but otherwise, what do you suggest? What are you guys doing? What can we do as investors and entrepreneurs to get out in front of this?

Brian Riedl:

I don't have a lot of great suggestions. I think in terms of you're an investor, be ready for capital gains taxes to go up, move money around that you need to move around before that, anything you can do. There's a lot of things you can do, planning for estate taxes. I think if you prepare for the possibility of estate and investment taxes going up and do as much as you can to move it around and shield it now, you're probably better off. But we'll have to wait and see.

Brian Riedl:

My hope is a lot of this isn't going to pass, beyond the higher corporate rate. Also be ready, there's a big push to close the tax gap. And while we all want the owed taxes to be paid, there's some very aggressive moves that they're looking at, which are going to affect your financial privacy. And so I think it's important for people to start thinking about financial privacy, particularly in their bank accounts and how the government is going to start spying on your bank account and take that into account for where you want your money and what you want the government to see or not see.

Tom Wheelright:

That's a good point. That's something we didn't discuss is that in this proposal, there is a view into everybody's bank account, which I think will end up, I personally think will end up, given the current IRS commissioner and their point of view, that it will end up everybody having to justify every single dollar that goes into their bank account and justify every … It's okay to justify everything, every dollar that goes out. I have no problem with that.

Tom Wheelright:

But having to justify every dollar that goes in is challenging. And I'll tell you what, it's certainly the accountant's full employment act. So I'm good from that standpoint, it's good for our business. I think it's harsh on the economy, so I appreciate you bringing that up. So Brian, where can we get more information from you and the Manhattan Institute?

Brian Riedl:

You can Google Manhattan Institute, and you can go to my publications page on there. Brian Riedl R-I-E-D-L. Also I'm aggressive on Twitter, tweeting out usually commentary on policy moves of the day. I do a lot of myth-busting on Twitter at Bryan underscore Riedl, R-I-E-D-L, where I'm spending a lot of my time just dunking on Robert Rice, the former labor secretary posting nonsense, but between the Manhattan Institute suit and my Twitter account, there's a lot there every day.

Tom Wheelright:

Well, Brian, really appreciate you being on. I just think this is such a massive, bold, massive proposal. And my fear of course, is that the Democrats could get it together and actually get something together … They might go big and in the meantime, we'd better prepare for it. And when we do prepare for it, the good news is we'll always make way more money and pay way less taxes. We'll see everyone next time.

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