The political winds are whipping up The Tax The Rich wildfire…What to do?

As every clear eyed HNW American now acknowledges, the possibility of? “Tax The Rich” proposals becoming reality has moved forward significantly with Kamala Harris endorsing the taxation of unrealized capital gains. Longtime readers of my blog know that I prefer to deal with things as they are, not as I would hope them to be. Accordingly, the purpose of this blog is not to debate the pros and cons of various tax proposals by the US Presidential candidates. Rather it is to provide some practical strategies for HNW Americans on how to insure that they can avoid being adversely impacted should the unlikely but possible occur and these proposals become future law.

As she has stated, Kamala Harris supports

-Increasing the capital gains tax rate to 28%; and

-Adopting the Biden platform on taxation of unrealized capital gains…commonly referred to in the press and by politicians as the “Billionaire Tax”. This would apply an annual 25% minimum tax rate, including on the unrealized gains, for Americans who own $100 million or more in assets.

Her proposals raise three significant red flags. The first red flag is that the term “Billionaire Tax” is very misleading because $100M is not a billion. If your net worth is $100M or above, it could apply to you…so please don’t ignore any serious discussions or articles that use this term.

The second red flag is that if your net worth is below $100M, it might also apply to you at some point. If this new tax turns out to be generally acceptable to the voting public and politicians, the threshold could easily be lowered to $75M, $50M…or even less. It’s anyone’s guess.

A third red flag is the definition of “assets”. What constitutes taxable assets is already being politicized…with one side assuring you that it only applies to some assets, while the other side is screaming that it will apply to all assets. So hoping the new tax will apply only to some assets is not a risk management plan.

The reason I raise these three red flags is that for proactive risk management purposes, the math is simple. If you adopt a “worst case scenario” approach, you will be taxed at a total 25% rate on all your income and capital gains both realized and unrealized. The question then becomes, "Is your total new annual tax exposure something you want to have the choice to avoid?”.?? If your answer is YES, let’s go to Step 2 and consider the probability that this tax on unrealized gains might actually happen.

Many commentators have dismissed the possibility that the wealth tax will occur, and they might end up being correct. But then again, they might not.? In either event, it makes sense for HNW Americans to be ready for both possibilities and protect themselves against any risk. Just like when one considers whether or not to purchase fire insurance for their home, one contemplates the likelihood of a fire engulfing the home against the potential damage and the relative cost of insuring against that damage. So let’s take a look at candidate Harris’s tax proposals and their predicates. Then let’s assign probabilities on these predicates occurring. (Note: These are estimates based on my agnostic assessment.)

For these proposals to become law the following must happen:

1) Harris wins the Presidency: Estimated odds 50%

2) Democrats win a majority in both houses of Congress: Estimated odds 25%

3) Progressive Democrats convince Moderate Democrats to pass either the Billionaire Tax Act or the Ultra-Millionaire Tax bills: Estimated odds 25%

Considered together, the chance that the political winds will cause this new Tax The Rich Wildfire to hit HNW Americans’ fiscal houses is just over 3% (i.e. 50 x .25 x .25 = 3.125). When put in this context, as a HNW American would you consider buying home insurance if there was a 3% probability of it catching fire every year?? The obvious response is to compare the premium for the fire insurance and the cost of a fire escape plan against the annual damage to your fiscal house. For your reference, I have mapped out this concept in more detail in a blog entitled: "Wealthy Americans are living in a political wildfire zone: What should they do to protect their family wealth…. and well-being?".

The one-time cost of the Fire Insurance of a second residence and / or citizenship will vary depending upon family history. However, even at its most expensive the ONE-TIME? “premium" is a rounding error when compared to the ANNUAL tax bill if these proposals become law.

It is worth noting that some commentators have opined that the taxing of unrealized capital gains is unconstitutional. Others have said that it would be constitutional. The recent SCOTUS decision in Moore vs. The United States has left this an open question. However, one of my UHNW clients recently responded to his American attorney’s confident assertion that such a tax would be unconstitutional by asking him "And how many years would I pay that wealth tax before SCOTUS agreed with you?"

It is also worth noting that a potential new wealth tax is not the only concern of my American clients. Their other expressed concerns include political polarization and violence, the mass shooting epidemic, rising racism, antisemitism, islamophobia and anti- LGBTQ…all factors that are also driving Americans to consider acquiring Fire Insurance. This Fire Insurance is then incorporated into a “Fire Escape Plan" that includes either moving abroad or expatriating from the US. In another paper, I elaborate more about Fire Escape Plans, and in two white papers I set out in detail strategies for Americans Living Abroad and Expatriation.

If you would like to discuss a strategy of getting Fire Insurance and a Fire Escape Plan for your family, please do not hesitate to contact us to arrange a consultation.