Highlight / May 8, 2021

The Price Of Being Too Wealthy In America

Disclaimer: The following article in no way represents financial or tax advice of any kind. Always seek the advice of a third-party financial or tax advisor before making any related decision. The following article is exclusively the opinion of the author. Farmfolio assumes no legal liability for any decision made on the basis of this article. 

Only two things are certain in life: death and taxes. While the former is rather straightforward, there are countless ways for a nations’ decision-makers to calculate everyone’s fair share of the latter. 

While capital gains tax is only one of the methods governments use to secure funding, it’s been the most discussed in recent weeks. 

Elevated public concern over tax hikes comes on the heels of a massive announcement by President Biden.

The President’s next budget proposal will include a law that raises the capital gains tax to as much as double its current rate.

Why is President Biden Turbo-Boosting the Capital Gains Tax?

 

In the wake of a global pandemic, why would the government decide to double some taxes suddenly? Luckily the policy is more nuanced than simply slapping every American with a higher bill on April 15th

The recent U.S. equity market surge has subtly shifted how citizens and governments view taxation.

While Main Street grappled with the pandemic, the nation’s billionaires added huge sums to their net worth. These massive gains perturb most people for a simple reason: they’re taxed almost exclusively as long-term capital gains. 

Currently, wages are taxed more heavily than capital gains — citizens pay a higher tax rate on their salaries than on their investment portfolio. 

Many people see that as the unfair subsidization of Wall Street at the expense of working people. Shifting public perception is giving the government the impetus it needs to raise the long-term capital gains rate. 

After all, funding trillions of dollars in emergency programs must come from somewhere, and billionaires are top-listers.

Who Gets The Short Straw in the Capital Gains Hike?

 

While the bill allegedly targets the richest of the rich, governments aren’t always known for enacting the most nuanced of policies. 

The highest long-term rate bracket in the new bill applies to the sale of an asset by an individual who generates revenue of more than $1 million. 

Theoretically, Biden’s approach generates maximum tax revenue for the government without punishing retail investors. Unfortunately, such an approach can harm small and medium business owners during a crucial point in the scaling process.

Numerous businesses have permanently closed due to COVID-19

However, most analysts don’t see the proposal passing. Getting the bill through requires unanimous support from Democrats and defectors from the Republicans. It’s unlikely given the radical nature of the tax increase. To the relief of many investors, if a significant long-term capital gains tax bill wants a chance of passing, it has to be a lot more subdued.

Despite the narrow applicability and slim chance of passing, Team Biden has set a narrative that’s likely to last for years to come. 

Biden’s capital gains tax legislation and any similar move completely upend existing investment strategies. Investors have a difficult set of decisions to make:

Do you sell an investment with the currently established tax rates, or do you sell later down the road and risk much higher long-term capital gains? 

The answers remain increasingly relevant, but subjective and highly specific to each individual investor. 

Another Straw on the Camel’s Back

 

In addition to this proposed capital gains tax hike, investors are staring down the barrel of a very uncertain fiscal future. 

Inflationary warning signs are flashing red hot as the Federal Reserve remains disconnected. 

Chairman Powell recently cited this week’s inflation upticks as “transitory,” suggesting no immediate action by the Fed.

Rising inflation further threatens equity markets. To combat any significant uptick in inflation, the Fed must raise rates and end the cheap monetary regime that dominated the 2010’s. 

However, it’s unlikely that the Biden administration will expose itself to this type of political fallout. Such a reversal would likely send markets plunging as corporations struggle to secure financing at preferable rates.

Incoming inflation, frothy equity markets, and impending capital gains tax hikes make for a trying macroeconomic environment. Investors are carrying an increasingly heavy burden in an ever-more volatile market. 

While investors aren’t rushing to exit the Wall Street casino, they’re astutely eyeing alternative assets and inflation-hedging opportunities. 

Plant Your Hedge

 

Thankfully, we’ve been here before.. 

History offers us plenty of examples of where to go when the macroeconomic waters get choppy. Out of all the alternative assets, commodities have proven to be one of the best portfolio hedges during times of macroeconomic uncertainty. 

Durable and finite commodities are a natural hedge against inflation and often qualify for preferential tax exemptions.

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The timing couldn’t be more perfect — commodity prices are surging from record lows and are now some of the best-performing assets year-to-date. 

These market cycles sometimes last for decades and entail shocking countercyclical price action that can shield portfolios from equity market downturns. With major banks now declaring a new Commodity Supercycle, the asset class is starting to enjoy its day in the sun. 

Within the commodities family, agricultural investments present one of the most differentiated opportunities for investors. US farmland has enjoyed annualized returns of over 12% since 2000. These figures are even higher in emerging markets where land prices are cheap and growing seasons longer. 

The diversity afforded to investors in ag commodities is unparalleled. Investors can cultivate both annual and permanent crops to extend the longevity of their investment. By acquiring agricultural commodities in different countries, investors can minimize tax and political risk. 

Additionally, agricultural commodities have been called “gold with a coupon” due to the durable nature of the land and the income opportunities presented by its cultivation. 

Investors derive passive income through selling the commodities the land produces while enjoying any appreciation in the land itself. 

The generous tax exemptions offered by many jurisdictions for land development further cements agricultural commodities as a good alternative asset and portfolio hedge.

The zeitgeist has shifted towards higher taxes. While most billionaires are on board with the increase, recent proposals, unfortunately, include smaller investors and businesses. 

With the biggest capital gains tax hike since World War Two in the cards, the need to hedge your portfolio against coming macroeconomic uncertainty is more important now than ever before. In this environment, noncorrelated assets in agriculture can be an investor’s best friend.