President Joe Biden will propose to nearly double the capital gains tax rate for wealthy individuals, or up to 43.4%. This will help fund a plethora of social spending programs designed to address long-standing inequality.
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Rise in Capital Gains Tax
Sources privy to the unannounced proposal shared the initial figures. Wealthy American investors earning $1 million or more face a federal tax rate as high as 43.4%.
In addition, the proposed marginal 39.6% rate becomes double the current base rate of 20%. Meanwhile, the 3.8% tax on investment income that funds Obamacare will remain. In effect, this pushes the tax rate on returns on financial assets higher than rates on some wage and salary income, they said.
For investors earning more than $1 million in high-tax states, the rates can climb above 50%. For example, New Yorkers will pay a combined state and federal capital gains rate that’s as high as 52.22%. For Californians, it gets higher at 56.7%.
Upon hearing the news, stocks went down immediately. The S&P 500 Index plunged 0.9% at Thursday’s close, its sharpest decline in over a month.
Ten-year Treasury yields fell to 1.54% from an intraday high of 1.59%. Expectedly, Wall Street is far from excited with the proposal. Thomas Hayes, chairman of hedge fund Great Hill Capital, gave their assessment of the plan. “If it had a chance of passing, we’d be down 2,000 points,” he said, referring to the indexes.
Equalizing Capital Gains Taxes With Income Taxes
If passed into law Biden’s proposal can make his campaign promise of equalizing income and capital gains tax rates for wealthy individuals.
Previously, the President said it’s unfair many of the nation’s wealthiest pay lower taxes than middle-class workers. The proposal can reverse a long-standing tax code provision that taxes investment returns lower than labor.
Asked about the proposal, White House Press Secretary Jen Psaki said it’s still a work in progress. “We’re still finalizing what the pay-fors look like,” she said.
Biden is expected to release the proposal next week as part of the tax increases to fund social spending in his proposed American Families Plan program. This program proposes funding for childcare, universal pre-kindergarten education, and paid leave for workers.
Elimination of the Carried Interest
Biden’s proposal will also create a side effect. Equalizing the tax rates for wage and capital gains will curb the so-called carried interest. This is the cut of investment profits collected by private equity and hedge fund managers.
The plan will effectively end carried interest benefits for fund managers making more than $1 million. With the new rates, investors won’t get to pay lower capital gains rates on their earnings. However, those earning less than $1 million may still claim the tax breaks. Unless Biden decides to repeal that provision as well.
Republicans Want None of This
In order for Biden’s plan to work, he will need the support of a few GOP lawmakers in the House and the Senate. However, the Republican Party isn’t keen on lending a hand.
Instead, GOP members insist that the 2017 tax cuts implemented by former President Donald Trump don’t need changing. In fact, the current capital-gains framework encourages saving and promotes future economic growth.
Senator Chuck Grassley (R-IA) said the plan will backfire horribly. The top Republican in the Senate Finance Committee said the 2017 tax cuts are doing the job.“If it ain’t broke, don’t fix it,” he said.
In addition, increasing capital gains tax is going to “cut down on investment and cause unemployment,” Grassley warned. Instead of hiking tax rates, Republicans called for repurposing previously appropriated, unused pandemic-relief funds to help pay for their counteroffer infrastructure plan.
American Families Plan
As the intended recipient of the capital gains tax increases, the American Families Plan aims to increase spending on children and education. Biden will spell out the details of the plan in a joint address to Congress on April 28. Some of the proposed programs include a temporary extension of an expanded child tax credit. This benefit currently gives e parents up to $300 a month for young children or $250 for those six and older.
Watch the CNBC TV report on what higher capital gains taxes could mean for markets and the economy:
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