President Joe Biden will propose raising the capital gains tax rate to 39.6% for those earning more than $1 million a year, Bloomberg reported Thursday. That would roughly double the current capital gains tax rate of 20% for those high-income households and, when combined with the current 3.8% surtax on investment income that helps fund Obamacare, produce a top rate of 43.4%.
The proposal is expected to be released next week, when the White House unveils its “American Families Plan” to increase spending on things like education, child care and paid leave, at an estimated cost of roughly $1.5 trillion. The capital gains tax increase is projected to raise $370 billion over 10 years, according to an analysis by the Tax Policy Center, with the revenues intended to help cover the costs of Biden’s proposed investments in what administration officials are calling “human infrastructure.”
If enacted, the tax increase would mark a significant change in how investment gains are treated in the tax code relative to labor. Biden has pledged to equalize tax rates on the two, which for many years have been unequal, with investment gains being taxed at a lower rate than labor income. During the campaign, Biden argued that it was unfair that wealthy investors paid lower tax rates on the sale of stocks and bonds than workers did on their more modest incomes derived from their jobs.
Investors react: The news sent shockwaves through Wall Street, with stocks falling sharply. Andrew Mies, chief investment officer of 6Meridian, told the Associated Press that investors were reacting to a new unknown factor. “The knowns are the economy is good and improving, earnings are good and vaccinations are going pretty well in the United States,” Mies said. “The things the market doesn’t know are tax policy, both at the corporate and individual level, and what the Fed is going to do in the next 12 to 18 months.”
Jack Ablin of Cresset Capital Management said the selling could continue, depending on how things play out. “Biden’s proposal effectively doubles the capital gains tax rate on $1mm income earners,” he said, according to CNBC. “That’s a sizable cost increase to long-term investors. Expect selling this year if investors sense the proposal has a chance of becoming law next year.”
But some investors expressed doubts about the likelihood of passing the tax increase, at least at the level being discussed today. “I think these are also trial balloons and sort of laying the stake out for future negotiations,” Doug Sandler of RiverFront Investment Group told CNBC. “If I want to get something done, the first thing I’m going to do is come with a really extreme request and then I’m going to negotiate back from that. That’s just the way politics work. I’m not going to guess we’re going to double the capital gains tax because that narrow majority in Congress, that seems too controversial to get passed, but it starts the framework that taxes are going higher.”
Biden eyeing other tax increases on the rich: Administration officials continue to debate other possible tax increases that could be used to pay for Biden’s forthcoming American Families Plan, according to The New York Times. Biden is reportedly planning to call for raising the top individual income tax rate from 37% to 39.6%, and officials are reportedly considering capping deductions for rich taxpayers or raising the estate tax.
Other elements of the plan have changed recently, the Times’s Jim Tankersley reports: “Administration officials had planned to include a health care expansion of up to $700 billion, offset by efforts to reduce government spending on prescription drugs. But they have decided to instead pursue health care as a separate initiative, a move that sidesteps a fight among liberals on Capitol Hill but that risks upsetting some progressive groups that have pushed Mr. Biden to prioritize health issues.”
