Biden eyeing capital gains tax as high as 43.4% for wealthy

People walk by a Ferrari dealership in Manhattan on April 06, 2021 in New York City.
People walk by a Ferrari dealership in Manhattan on April 06, 2021 in New York City.PHOTO: AFP

WASHINGTON (BLOOMBERG) - President Joe Biden will propose almost doubling the capital gains tax rate for wealthy individuals to 39.6 per cent to help pay for a raft of social spending that addresses long-standing inequality, according to people familiar with the proposal.

For those earning US$1 million (S$1.3 million) or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could be as high as 43.4 per cent.

The new marginal 39.6 per cent rate would be an increase from the current base rate of 20 per cent, the people said on the condition of anonymity because the plan is not yet public.

A 3.8 per cent tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than rates on some wage and salary income, they said.

Stocks slid the most in more than a month on the news, with the S&P 500 Index down 0.9 per cent at the close. Ten-year Treasury yields fell to 1.54 per cent from an intraday high of 1.59 per cent before Bloomberg’s report.

The proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labour. Biden campaigned on equalizing the capital gains and income tax rates for wealthy individuals, saying it’s unfair that many of them pay lower rates than middle-class workers.

White House Press Secretary Jen Psaki, asked about the capital-gains plan at a press briefing Thursday (April 22), said, “we’re still finalising what the pay-fors look like.”

Biden is expected to release the proposal next week as part of the tax increases to fund social spending in the forthcoming “American Families Plan.”

Other measures that the administration has discussed in recent weeks include enhancing the estate tax for the wealthy. Biden has warned that those earning over US$400,000 can expect to pay more in taxes.

The White House has already rolled out plans for corporate tax hikes, which go to fund the US$2.25 trillion infrastructure-focused “American Jobs Plan.”

Republicans have insisted on retaining the 2017 tax cuts implemented by former President Donald Trump, and argued that the current capital-gains framework encourages saving and promotes future economic growth.

“It’s going to cut down on investment and cause unemployment,” Chuck Grassley of Iowa, a top Republican on the Senate Finance Committee and former chair of that panel, said of the Biden capital-gains plan.

He lauded the result of the 2017 tax cuts, and said, “If it ain’t broke, don’t fix it.”

GOP lawmakers on Thursday called for repurposing previously appropriated, unused pandemic-relief funds to help pay for their counteroffer infrastructure plan. The group underlined opposition to tax hikes, other than a potential revamp of the levies that go towards highway funding in a way that would cover electric vehicles.

Biden will detail the American Families Plan in a joint address to Congress on April 28. It is set to include a wave of new spending on children and education, including a temporary extension of an expanded child tax credit that would give parents up to US$300 a month for young children or US$250 for those six and older.

Biden’s proposal to equalise the tax rates for wage and capital gains income for high earners would greatly curb the favorable tax treatment on so-called carried interest, which is the cut of profits on investments taken by private equity and hedge fund managers.

The plan would effectively end carried interest benefits for fund managers making more than US$1 million, because they wouldn’t be able to pay lower capital gains rates on their earnings. Those earning less than US$1 million may be able to still claim the tax break, unless Biden repeals the tax provision entirely.

The capital gains increase would raise US$370 billion over a decade, according to an estimate from the Urban-Brookings Tax Policy Center based on Biden’s campaign platform.

For US$1 million earners in high-tax states, rates on capital gains could be above 50 per cent. For New Yorkers, the combined state and federal capital gains rate could be as high as 52.22 per cent. For Californians, it could be 56.7 per cent.

Democrats have said current capital gains rates largely help top earners who get their income through investments rather than in the form of wages, resulting in lower tax rates for wealthy people than those they employ.

Capital gains taxes are paid when an asset is sold, and are applied to the amount of appreciation on the asset from when it was bought to when it is sold. Congressional Democrats have separately proposed a series of changes to capital-gains taxation, including imposing the levies annually instead of when they are sold.

“There ought to be equal treatment for wages and wealth,” Senate Finance Committee chairman Ron Wyden, an Oregon Democrat who’s the chamber’s top tax-writer, told reporters in a phone briefing Thursday.

“On the Finance Committee we will be ready to raise whatever sums the Senate Democratic caucus thinks are necessary.”