President Joe Biden is expected to include a long-term capital gains tax hike in his American Family Plan, targeting the earnings of the top 0.3% of Americans in an effort to treat capital gains and income similarly for the wealthy.
“That's about 500,000 households in the country that we're talking about,” White House National Economic Council Director Brian Deese said at a press conference on Monday. “For the other 997 out of 1000 households in the country — or the other 150 million households in the country — this is not a change that will be relevant and won't change their tax treatment of capital gains at all.”
Under Biden’s proposal, the top long-term capital gains and qualified dividends tax rate would increase to 39.6% from 23.8%, with an effective rate of 43.4% when the Medicare surcharge is added. The increased rate would apply to those earning over $1 million. Investors currently pay 23.8% as the top capital gains rate along with the 3.8% net investment income tax, known as the Medicare surtax.
The rate would also vary by state because some states have their own state or local capital gains taxes. For instance, California, New York, Minnesota, and Oregon would have the highest top capital gains rates of 56.7%, 54.3%, 53.3%, and 53.3%, respectively. The average capital gains tax rate would be 48% across the U.S. compared with 29% under current law, according to an analysis by the Tax Foundation, a right-leaning think tank.
‘We should tax at the same rate ordinary income and capital gains’
Biden’s tax proposal would double the capital gains rate, increasing it to its highest level in almost 100 years, according to the Tax Foundation.
“As far as capital gains tax rates go, this would be the highest top rate since about the 1920s,” Erica York, an economist with the Tax Foundation, told Yahoo Money. “We would top the charts, especially in some of these states and localities that have either relatively high capital gains tax rates… much higher than the global norm.”
Americans who make more than $1 million get only 30% of their income from wages, while those who make less receive 70% of their income from wages, according to Deese. Raising the capital gains rate for those at the top would prevent them from getting an effectively lower tax rate than those who receive most of their income from wages.
In 1986, President Ronald Reagan raised the capital gains rate to 28% from 20% to help equalize the tax treatment of ordinary income and capital gains. The current situation, though, requires a bigger increase, according to Deese.
“A lot has changed in the economy since then,” he said. “The principle is the same, which is that for the very highest income Americans, we should tax at the same rate ordinary income and capital gains.”