A demonstrator wears a Tax the Rich t-shirt during a national day of resistance to demand a safe, scientific, racially just and fully funded approach to reopening schools during the outbreak of the coronaviruses COVID - 19 in Los Angeles, California, August 3, 2020. REUTERS Mike Blake File Photo
NEW YORK, Nov 16, Reuters - wealthy individuals plan to avoid paying for the spending package as Congress looks to advance its $1.75 trillion spending package this week.
The Senate will have a chance to take up the Democrats' social spending bill in the U.S. House of Representatives this week.
The plan would be the biggest expansion of the U.S. safety net since the 1960s and Democrats propose paying for it by levying a 5% surtax on individuals with more than $10 million in annual income and an additional 3% tax on individuals with more than $25 million in annual income.
While the White House says the new surtax could generate $230 billion for the spending bill, experts and bankers say that many individuals will find ways to avoid it and that it will raise less than an earlier proposal for a billionaires tax.
Even though on paper it looks like it increases the taxes on ultra-millionaires, in reality it's not going to have as much bite, said Emmanuel Saez, professor of economics at the University of California at Berkeley.
The proposed billionaires tax, targeting roughly 700 Americans, sparked anger from Elon Musk, who is the world's richest man.
The plan, which taxed unrealized share gains, was ditched after moderate Democrats opposed it, arguing it unfairly targeted wealth creators.
Musk tried to get ahead of any Democratic plans to hike taxes by selling $6.9 billion in Tesla Inc TSLA.O stock last week. The House will vote on the bill, and details are not yet known. Bankers, lawyers and academics expect it to include the White House's proposal for the up to 8% surtax, but not the billionaires tax.
Alvina Lo, chief wealth planner at Wilmington Trust, said the surtax is straightforward for wealthy taxpayers to plan around.
The tax will not apply, so the goal is to get your modified adjusted gross income below the threshold.
The billionaires tax, in contrast, would have been very difficult to avoid, said Lisa Featherngill, Comerica Bank's national director of wealth planning.
The levy would apply to individuals with assets worth more than $1 billion or more than $100 million for three years in a row. Individuals would have to reduce their income or assets by half to avoid paying the tax.
If you have a billion assets, getting to $500 million is not easy, Featherngill said.
Some wealthy people are trying to bring their personal income to below the $10 million threshold for 2022 by transferring earnings they receive through so-called S corporations or passing through tax structures to C corporations.
S corporations are popular with Wall Street investors and owners of private equity firms and hedge funds. The structure allows them to declare their earnings from the business as personal income - avoiding the additional layer of corporate income tax.
The proposed bill will add state income taxes to a top rate of 48.8% at the federal level and at over a 60% rate in California and New York.
By switching their S corporation tax structures to a C corporation, wealthy individuals will be able to keep their annual income below the $10 million threshold, even though the earnings must be retained in the business, where they will pay a corporate tax of 21%.
Wealthy individuals are selling stock this year, before the surtax takes effect, and planning to spread out future stock sales over several years to avoid hitting the $10 million-surtax threshold, bankers say.
Individuals will still pay capital gains and investment income taxes up to 23.8%, but that is less than the 31.8% tax the highest income earners could pay next year overall if the spending bill is passed, Lo said.
It is not clear if the Democratic lawmakers are aware of the potential loopholes.
Frank Clemente, executive director of Americans for Tax Fairness, said the tax surcharge was a big improvement but not enough.
He said that the millionaires surtax does not solve the problem of unrealized capital gains. The billionaires income tax would solve the scandal of tax-free billionaires.