Biden Eyeing Capital Gains Tax Rate as High as 43.4%

To help pay for a raft of social spending that addresses long-standing inequality, President Joe Biden proposes doubling the capital gains tax rate for wealthy individuals to 39.6%. This would be an increase from the current base rate of 20%, which means that for those who are earning $1 million or more, coupled with the existing surtax on investment income, federal tax rates could be as high as 43.4%. The 3.8% tax on investment income that funds Obamacare would still be kept in place, causing the tax rate on returns of financial assets higher than the rate on most wage and salary income.

Biden campaigned to equalize the capital gains and income tax rates for wealthy individuals, stating that it’s unfair that many of them pay lower rates than middle-class workers. The proposal could reverse this long-standing provision of the tax code where returns on investments are lower than labor. Mid-April, White House Press Secretary Jen Psaki stated that they are still finalizing the details. This proposal is expected to be discussed as a part of the tax increases to fund social spending in the forthcoming “American Families Plan.” The White House has already rolled out plans for corporate tax hikes, which will be used to fund the $2.25 trillion infrastructure-focused “American Jobs Plan.”

Biden’s proposal to equalize 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 $1 million because they wouldn’t be able to pay lower capital gains rates on their earnings. Those earning less than the million dollar mark may be able to still claim the tax break, unless Biden repeals the tax provision entirely.

The capital gains increase would raise $370 billion over a decade, according to an estimate from the Urban-Brookings Tax Policy Center based on Biden’s campaign platform. For $1 million earners in high-tax states, rates on capital gains could be above 50 percent. For New Yorkers, the combined state and federal capital gains rate could be as high as 52.22 percent. For Californians, it could be 56.7 percent. 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.

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