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PODCAST: 2020 is over, but the uncertainty remains

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PODCAST: 2020 is over, but the uncertainty remains

By: Dean Dorton | January 27, 2021

Maddie Schueler, a Dean Dorton colleague and tax law expert, joins host Justin Hubbard in this episode. Maddie and Justin speculate on the vast uncertainty across the political spectrum and discuss President Biden’s tax proposals. This episode was recorded on January 6, 2021, the day after the Georgia Senate runoff but before the outcome was final.

Tax | Unhinged Podcast

Episode 16

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Transcription

Justin Hubbard:
2020 is over, but the uncertainty remains. Today it’s my privilege to have Maddie Schueler on Unhinged. Maddie is a colleague at Dean Dorton who happens to be a tax expert and an attorney. Maddy and I go toe-to-toe to determine who knows less about the tax code (spoiler alert, I dominate that competition).

For reference, it’s January 6th, year 2021, a day after the carnage of the Georgia Senate runoff, and we still don’t know the outcome. Maddie and I speculate on the vast uncertainty across the political spectrum, the potential tax ramifications of the election outcome, what we know about President Biden’s tax proposals, and where she is going to flee if things don’t work out her way.

Maddie Schueler, welcome to the show.

Maddie Schueler:
Thanks, Justin.

Justin:
How are you today?

Maddie:
I’m good. How are you? Happy to be here.

Justin:
Yeah, glad you’re here. Happy new year.

Maddie:
Thank you. Same to you.

Justin:
We’re six days into 2021, a lot happening in the world. You have a very interesting background and some cool perspective on if some of the uncertainty in the world, specifically as it relates to the election, the potential tax ramifications. So I look forward to digesting some of that with you. But first, let’s get to know Maddie Schueler.

Maddie:
Sounds good.

Justin:
What are your hobbies? What do you like to do when you’re not reading tax code?

Maddie:
Well, I like to travel. Unfortunately, the pandemic has put a little bit of a damper on that, but normally I like to travel and go different places, see different cultures, and looking forward to the times when we can all travel again.

Justin:
If money was not an option, where would you travel to and just park for the rest of your life?

Maddie:|
Last year, right before all of this happened, my husband and I did a sailing trip in the British Virgin Islands, and that was really neat. It was beautiful there and it was just it was a fun adventure. So doing something like that would be fun.

Justin:
So just imagine. If you had stayed on that boat, you would have been totally immune to 2020.

Maddie:
That’s true. I know. We should have stayed. It was January of 2020 that we went, and so we got it in just in time.

Justin:
Alright. Let’s dive into the meat of our conversation, if you will. There’s a ton of uncertainty in the world right now. We’ve got a Presidential election that is somewhat being contested. Yesterday we had the special Senate runoff in the state of Georgia for two key Senate seats. Those results are rolling out today. Why now? Why 2020, 2021? Why, in your opinion, is everything just such a hot mess?

Maddie:
That’s a great question. I don’t know if I have a perfect answer, but I will say, I think a lot of the uncertainty, with respect to the election, came from the fact that it was so unusual in that we didn’t know on election night like we normally do. And you mentioned the Georgia runoffs. And so, of course, we’ve had to wait several weeks before and still as we’re talking right now don’t know what the final makeup of the Senate is going to be. And so I think that that created a lot of uncertainty for people, because of course, Congress makes the laws and the President signs the laws, but not knowing what the makeup of Congress is going to be makes it very uncertain what’s going to happen. Will President-elect Biden be successful with his agenda and some of his proposals? And a lot of that is going to depend on the makeup of the Senate. It certainly has been a wild ride and a year like no other, I think.

Justin:
Yeah. Hopefully it’s not duplicated anytime soon. So just big picture, what are some ramifications if the Republicans win the two seats versus the Democrats winning two seats? I mean, what happens if it’s split 50/50?

Maddie:
I guess as we’re talking right now, it looks like that the Democrats are projected to win one of the two seats, and the other race is still close to call. So this is perfect timing. I know you must’ve planned it this way, Justin, to have our podcast recording today.

Justin:
Exactly.

Maddie:
Yeah, exactly. And so if the Republicans end up winning that remaining seat, then the Republicans would maintain control of the Senate. And I think it would make it a little bit more difficult to know whether Biden would be successful in getting some of his proposals enacted, some of his tax proposals and other proposals, because we’d have a divided Congress. So right now, the Democrats control the House, and if Republicans win that remaining seat in Georgia, the Republicans would control the Senate.

Justin:
So potentially, I mean, I guess we’re looking at a potential situation of maybe some things get done versus with a lot of back and forth in Congress versus the Congress being one-sided and the Presidential office being the opposite, in which case nothing’s going to get done. And so some people theorize that from an economic standpoint and an investment retirement standpoint, that’s the best scenario so we’ll see stability and the nothingness that’s coming out of Washington, which is full of disparity.

Maddie:
Right. You hear the term gridlock a lot, right, when you talk divided government. But I think I heard that stocks tend to do well with that divided government, which was really interesting. So we’ll see. Of course, there’s the possibility that the Democrats win both seats, in which case there would be the 50/50 split in the Senate with VP Harris breaking the tie. So that would effectively give Democrats control of Congress.

Justin:
Yeah. Well, let’s dive into what we know about his proposals at the personal level, personal income taxation as proposed under President-elect Biden. In five words, what is the gist?

Maddie:
In five words, I’d say higher taxes on the wealthy. I think that was exactly five.

Justin:
Yeah, good job.

Maddie:
Yeah. There we go. And I say wealthy—probably a more appropriate term would be high-income, just because if we think about our current income tax system, we’re taxed on income that we earn. So our wages, for example. We’re taxed on gains from the sale of property, from the sale of stocks, things like that. So I guess, theoretically, you could have someone who is wealthy in the sense that they have a lot of assets, but they may not have a lot of income in any particular year. So high income is probably a little bit better term, but that would have been too many words. So I had to go with wealthy.

Justin:
You played the hand you were dealt.

Maddie:
That’s right. But I will say, he in particular, I’ve seen Biden mention raising taxes on individuals with incomes above $400,000. So I think that’s kind of the general metric that he’s used.

Justin:
Got it. So as you look at the proposals, who are the winners at this point or who will be the winners?

Maddie:
He’s proposed some things that I think would be favorable for lower to middle income Americans. So one thing I’ve seen he’s proposed is a credit for first-time home buyers. I don’t know exactly what that would look like. Maybe increasing the child tax credit. So that would be favorable for families with children. And so I know he’s at least mentioned some favorable proposals for middle income that would be targeted at middle income taxpayers as we try to emerge from the pandemic.

Justin:
Got it. Anything in particular for business owners at the individual level? Not so much the taxation for business, which we’ll talk about, but just for the folks who have a business, they file a schedule C and it flows through on their 1040. I just maxed out everything I know about that.

Maddie:
Well, it’s funny. You’re talking to a lawyer, so when you get into the tax forms, too, I’m right there with you. I’ve got to rely on our CPA colleagues to walk me through all the forms. But I’ve learned a lot more about them than I ever did.

But yeah, for business owners, I guess at the individual level, and this is getting into a complex area, but there was as part of that tax cuts and jobs act law a few years ago what we call the Qualified Business Income deduction, or the QBI deduction, which was a 20% deduction. And there are a lot of limitations, but it generally benefits if you’re a partner in a partnership, and it would benefit you at the individual level. And I’ve also read that Biden has talked about phasing that out for individuals with higher income. So just another way, for higher income individuals who were also business owners, that they might see their taxes affected under his administration.

Justin:
Got it, got it. So I’m sensing a theme. Let’s see if that theme continues. Corporate taxes, five words or less.

Maddie:
I think for that, I just have to go maybe with higher rates, which is only two words, but I think the theme does continue.

Justin:
Yeah.

Maddie:
So he’s talked about raising the rate for C corporations. Before the Tax Cuts and Jobs Act (TCJA), the top rate was 35%. And then the TCJA lowered that dramatically down to a flat 21% rate, and Biden has proposed raising that to 28%. So C corporations could see their tax rates go up perhaps under his administration.

Justin:
For sure. What does your crystal ball tell you about foreign activities? Will President-elect Biden’s tax proposals impact the amount of companies that are sending their operations overseas?

Maddie:
It could. I have seen him mention that he wants to target businesses that try to offshore their profits overseas in an attempt to reduce their U.S. income taxes. Haven’t seen a lot of details on exactly what his plan is. I know that that’s an area, I think, that’s been a concern for a while, and I don’t know that anyone’s come up with the perfect solution for how to fix it, but obviously trying to limit businesses from being able to do that. And so it will be interesting to see if he addresses that at all.

Justin:
Yeah. Some of these things, they look palatable on paper. I’m not saying I’m for them or against them, but the enforcement of them seems to be a nightmare.

Maddie:
Right.

Justin:
So the IRS has been overworked, understaffed for years now. This is more just me thinking aloud, but it’s like the increase in regulation is fine and dandy, but it’s only as good as it can be enforced.

Maddie:
I think that’s exactly right. And you’ve definitely seen … I’ve just thought about what it must be like working for the IRS this past year when they had all of these changes that came out with the Cares Act and then the most recent stimulus package that they’re trying to sort through and figure out how they’re going to implement it, how they’re going to enforce it. Then we had the deadlines, the tax deadline that was extended for 2020. So I think you’re absolutely right. I mean, I think for a long time now, and it’s probably been exacerbated this last year, they’ve really struggled with a lack of resources and how to enforce all of these tax changes. So I’ve got to give them a little bit of sympathy, I guess.

Justin:
Oh, yeah. I mean, it’s an important job, but who would want it?

Maddie:
Right. Yeah.

Justin:
So you’ve said over and over the expectation is that rates will increase. Have you had a chance just to think about or to look historically how has the U.S. economy responded when tax rates across the board go up?

Maddie:
Yeah. Of course, I’m not an economist, but I’ve heard that raising taxes could perhaps make, I know I think I’ve seen where some economists said that might make coming out of this pandemic more difficult. So I don’t know how that will affect Biden’s plan, when we might see tax changes, if at all. I know I’m sure initially the focus is going to be the pandemic and how we recover from that. And so it’s going to be interesting to see how he approaches, how his the administration approaches it, and again, what happens with Congress and how that plays into things as well?

Justin:
Yeah, yeah. That’s an interesting point. Seems like 2020 was such an odd year, obviously unprecedented times. We’ve got this election fiasco is going on at the Senate level and the Presidential level. It’s almost like it’s not … 2020 and we’re in 2021. It’s almost like nothing is really worth comparing to 2020. You can’t sit and say, “Well, the economy is going to recover.” Okay. At this point, recover from what? Or go back to what? 2019, 2018? I mean, figuring out what your baseline is very challenging.

Maddie:
Right. There’s really no roadmap. I mean, we’ve never been through anything like this before. And so yeah, like you said, there’s nothing to compare it to. And I think to some extent, I know it’s been said we’ll never go back to the way things were in 2019. There are certainly going to be changes to certain parts of our economy and the way that we do things that I think won’t ever go back to before.

Justin:
Yeah. Now, do you see other countries? I don’t know that you’re an expert in international tax law or the tax code in the British Virgin Islands, which you escaped from in January, but I mean, do you have any insight into other trends, the way that these proposed changes to the domestic tax law here in the States compares to our foreign friends?

Maddie:
Yeah. So I think overall the U.S. relies more, a lot more, I think, than other countries on income taxes and less on general consumption taxes. So taxes on sales of goods and services. So for example, if you look at Europe, and they’ve got the Value Added Tax, which is that general consumption tax, and over here, we have federal excise taxes on certain goods. So alcohol is a good example. There are excise taxes on alcohol and distilled spirits and beer, but you don’t have that federal general consumption tax like you see in some other countries. Of course, there are states that have general sales taxes. Most of our states do, but you don’t see anything like that at the federal level. And so I think that’s one difference between the U.S. and some other modern countries around the world.

Justin:
Now, if you’re just average Joe Citizen of the United States, and you’re just monitoring your news. You’re talking to your work friends. You’re getting the earful from mom and dad on your commute into work about how the world is ending. How can you stay informed? What do you do to stay informed on all the changes? Do you have any resources that you can share?

Maddie:
Yeah. So, I mean, I guess first of all, I’d say plug into us.

Justin:
Oh, yeah. Dean Dorton.

Maddie:
Yeah, that’s right. We’ve got to give a shoutout to our team. We’ve, of course, this past year have been putting out a lot of e-blasts and doing webinars and trying to get all the information out as everybody is trying to digest all of these changes. And so if you’re not signed up for our e-blast, definitely sign up for those, and we’ll help keep you informed about all of the changes going on.

Outside of that, Tax Notes is a professional publication that I read, but I don’t know. Unless you’re a tax nerd, you probably haven’t subscribed to that. So they’ve always got a lot of interesting articles. I think any major reforms certainly are going to be in the news. So to the extent that people listen to NPR or watch the news at night, I think you’ll probably get the heads up about changes that are in the works as well.

Justin:
Yeah, it’s the blessing and the curse of the 24-hour news cycle, I suppose.

Maddie:
I know. Exactly.

Justin:
What’s the next big trip?

Maddie:
I’ve heard that Prague is really neat, and I have never been there, so that’s been on my list. And so I would love to check that out. In fact, I think one of our colleagues, Jeff Ricketts, went there maybe about a year, year and a half ago, and he was telling me about it. And so I’m going to have to pick his brain and maybe put that up next on my list. So we’ll see.

Justin:
Wow. Look at you. You just made Jeff Ricketts famous.

Maddie:
I know. He better thank me after this. I don’t know that he ever knew he was going to be on this podcast, but he is now.

Justin:
Travel extraordinaire. Well, thanks for being on the show. And we’ll have to have you back on in a few months and just to see where we’re at, if your prognostications came to be.

Maddie:
Yeah. You can tell me everywhere I went wrong. But that sounds great. I’d love to be back.

Justin:
Alright. Thank you, Maddie.

Maddie:
Thanks, Justin.

Your Host

Justin Hubbard
Justin HubbardAccounting & Financial Outsourcing Director

With Guest

Maddie Schueler
Maddie SchuelerSenior Tax Consultant
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