Impact of Proposed Tax Changes for the 99%

Much has been written about the recent tax proposals and their impact to individuals and businesses that pay taxes in the top bracket. But what about everyone else? Here we dive into medium and long-term tax strategy for high income earners who aren’t quite in the top bracket. The table on the following page outlines key changes in the 9/13/2021 Ways & Means committee proposal and what actions individuals and small business owners should consider as a result.

On the chart below, we looked at the tax rate for single filers making $200,000 and $535,000 in today’s dollars. We indexed those amounts to inflation to simulate high-income earners over time and charted the corresponding statutory tax rate. As expected, we find relatively high rates in the 1940s through the 1970s and a significant reduction as a result of Reagan’s tax bill in the 1980s. From the 1980s to today, we see more modest changes.

The biggest takeaway is that tax reform lags in periods of high inflation. You see tax rates drifting higher in the late 1960s and 1970s for both income groups. This is not due to significant tax policy changes. Rather, the increase is driven by rising inflation adjusted income, which moves filers into a higher tax bracket. From 1965 through 1980, inflation averaged 6.6% annually, with some years as high as 12% or 13%. As pay was adjusted to account for higher inflation, the tax bands were not, leading to high tax payments.

In our last piece on inflation, we outlined our expectations on inflation. We expect inflation to drift higher, but not approach levels from the 1970s. Even a modest increase in inflation, combined with recent proposed tax increases, has the potential to have a significant tax impact for individuals and small business owners. See the table below for key changes and implications from the recent tax proposals. Schedule a call with us if you would like to further discuss the implications of potential tax changes.

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