US President Joe Biden will propose almost doubling the capital gains tax rate for wealthy Americans to 39.6 per cent to help pay for a raft of social spending that addresses long-standing inequality.
For those earning $1 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, sources told Bloomberg.
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 1.5 per cent from an intraday high of 1.5 per cent.
White House press secretary Jen Psaki, asked about the capital-gains plan at a press briefing on Thursday, said, “we are still finalising what the pay-fors look like”. Mr 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. Mr Biden has warned that those earning over $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 $2.3 trillion infrastructure-focused ‘American Jobs Plan’.
Republicans have insisted on retaining the 2017 tax cuts implemented by former President Donald Trump. They argued 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 capital-gains plan. He lauded the result of the 2017 tax cuts, and said, “If it ain’t broke, don’t fix it.”
Mr 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 $300 a month for young children or $250 for those six and older.
Mr Biden’s proposal to equalise the tax rates for wage and capital gains income for high earners would greatly curb the favourable 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 $1m, because they would not be able to pay lower capital gains rates on their earnings. Those earning less than $1m may be able to still claim the tax break, unless Mr 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 Centre based on Mr Biden’s campaign platform.