President Joe Biden wants to end the preferential U.S. tax treatment of investment income that has benefited the wealthy nationwide as he seeks to fund a massive new social spending program. But he will have to overcome a major political hurdle in Congress to get there.
The White House plans to propose to nearly double the capital gains tax rate for those earning $ 1 million or more, to 39.6%, according to people familiar with the proposal. It wouldn’t affect much. Only about 0.32% of U.S. taxpayers reported adjusted gross income greater than $ 1 million and capital gains or losses on their returns, according to 2018 Internal Revenue Service tax return data.
The move would send the highest federal rate on appreciation of assets sold by the rich as high as 43.4% including a surcharge to help pay for Obamacare. And that would reverse a centenary precedent of under-taxation of investments relative to wages and salaries.
White House Chief of Staff Ron Klain pointed out in a tweet Friday that the proposal, which Biden “campaigned extensively on, changes the tax rate for less than 1% of Americans (in fact, less than 1/2 of 1% of Americans). “
The surge in stock and real estate prices over the past year has only strengthened the resolve of Biden’s team to deliver on campaign pledges to demand higher taxes from the best. The president is betting the initiative will be popular enough to pass in Congress, where he cannot lose a single Democratic vote in the Senate and only a handful in the House, as Republicans are likely to be united in opposition.
Stocks fell the most in more than a month on the news Thursday, with the S&P 500 index closing 0.9% lower, although trading on Friday showed some leveling off. The index was up 0.3% as of 9:35 a.m. in New York.
“If a 1% drop in stock prices is all you get from a really big increase in capital gains taxes, that’s not a big deal,” the Nobel laureate said. economics Paul Krugman on Bloomberg TV. “Biden has an ambitious agenda” and to help pay for it, “significant tax increases are going to be history,” he said.
Biden campaigned to equalize capital gains and income tax rates for rich people, saying it was unfair that many of them pay lower rates than middle-class workers.
The new marginal rate of 39.6% would be an increase from the current base rate of 20%, people said on condition of anonymity because the plan is not yet public. A 3.8% tax on investment income that Obamacare funds would keep in place, they added.
White House press secretary Jen Psaki, when asked about the capital gains plan at a press briefing on Thursday, said: “We are still in the process of finalizing what the payments look like.” Biden is expected to release the proposal next week as part of tax increases to fund social spending in America’s next plan for families.
Other measures the administration discussed included strengthening the inheritance tax for the rich. Biden warned that those who earn more than $ 400,000 a year can expect to pay more taxes. The White House has already rolled out corporate tax hike plans, which are used to fund the $ 2.25 trillion U.S. infrastructure-focused jobs plan.
Republicans insisted on maintaining the 2017 tax cuts implemented by former President Donald Trump and argued that the current capital gains framework encourages savings and promotes future economic growth.
“It’s going to reduce investment and cause unemployment,” Chuck Grassley of Iowa, a senior Republican on the Senate Finance Committee and former chairman of that group, said of the Biden capital gains plan. He praised the result of the 2017 tax cuts and said, “If it ain’t broke, don’t fix it.”
GOP lawmakers called on Thursday to reallocate previously appropriate and unused pandemic relief funds to help pay for their counter-offer infrastructure plan. The group stressed opposition to tax increases, except for a possible overhaul of levies intended to finance highways in a way that would result in higher taxes on electric vehicles.
Biden will detail the U.S. plan for families in a joint address to Congress on April 28. It is expected to include a wave of new spending for children and education, including a temporary extension of an expanded child tax credit that would give parents up to $ 300 a month for young children or $ 250 for six years and over.
Biden’s proposal to equalize the tax rates on wage income and capital gains for high earners would significantly limit the favorable tax treatment of so-called carried interest, i.e. reduction in profits on investments made by private equity and hedge fund managers.
The plan would effectively end deferred interest for fund managers who earn over $ 1 million because they couldn’t pay lower capital gains rates on their income.
Those earning less than $ 1 million are still eligible for the tax break, unless Biden repeals the tax provision entirely.
The increase in capital gains would bring in $ 370 billion over a decade, according to an estimate from the Urban-Brookings Center for Tax Policy based on Biden’s campaign platform.
For $ 1 million earners in high-tax states, rates on capital gains could be above 50%. For New Yorkers, the combined state and federal capital gains rate could reach 52.22%. For Californians, it could be 56.7%.
“It is enough to sow fear in the hearts of taxpayers, whether they are Republicans or Democrats,” said Christopher Boyett, partner at Holland & Knight law firm, which advises high net worth individuals on tax planning matters, of of the Biden plan. “People take this seriously. It is a time of great anxiety.
Congress Democrats separately proposed a series of changes to the taxation of capital gains, including the taxation of levies annually rather than when they are sold.
“There should be equal treatment for wages and wealth,” Senate Finance Committee chairman Ron Wyden, an Oregon Democrat who is the chamber’s senior tax writer, told reporters during a conference call Thursday. “In the Finance Committee, we will be ready to raise the funds that the Democratic Senate caucus deems necessary.”