Democrats seek new tax on America's richest while scaling down other hikes

Tucked into the House Democrats’ tax plan to raise $2.2 trillion in tax revenue is a new tax on the country’s wealthiest Americans — but other, earlier proposals that target the rich have been scaled down or eliminated altogether.

The proposal from the House Ways and Means Committee includes a 3% surtax on individuals with an adjusted gross income of more than $5 million, something not included in President Joe Biden’s initial plan.

“[That] is significant,” Howard Gleckman, senior fellow at the Tax Policy Center, told Yahoo Money. “I suspect it's going to be a surtax on taxable income... there's still lots of ways for high-income people to reduce their taxable income.”

The 3% tax will be imposed on individuals, trusts, and estates and is expected to raise $127 billion over 10 years, according to the draft proposal. It is yet unclear whether the surcharge would apply only to ordinary income or would include capital gains, too, according to Gleckman.

‘Avoid the higher capital gains tax’

The new tax comes as the Democrats scale down the increase to the top long-term capital gains and qualified dividends tax rate to 25% from 20%, which would generate $123 billion over a decade.

Biden initially proposed a top rate of 39.6% for those earning over $1 million.

“The capital gains rate increase is obviously much more modest than what Biden proposed,” Gleckman said, “A 25% rate is just not that much of a change.”

Another tax hike Democrats left out was Biden’s proposed change on how assets are taxed when passed onto heirs.

Under Biden’s proposal, gains over $1 million for single filers ($2.5 million for joint filers when combined with existing real estate exemptions) would be taxed based on the asset’s value when it was initially acquired — rather than the value when it was inherited.

“What you're doing is you're essentially signaling investors to hold on to an unproductive asset to avoid the higher capital gains tax,” Gleckman said. “If you have unrealized gains at death, a lot of that incentive would go away.”

‘A very ambitious start’

Biden’s proposal to increase the top individual income tax rate made it into the Democrats’ plan.

Both propose to revert the top individual income tax rate back to 39.6% for taxable income above $400,000. That rate is currently 37%, established by the Tax Cuts and Jobs Act of 2017 passed during the Trump administration. The provision is expected to raise $170 billion over 10 years.

Overall, the House Democrats tax plan is estimated to raise $2.2 trillion over a decade, with $1 trillion coming from tax hikes on high-income individuals, $900 billion from corporate and international tax reform, and additional revenue from increased tax compliance. The majority of the changes would be effective after December 31, 2021.

The tax proposals may change as Democrats finalize the bill that they hope to pass in the coming weeks through reconciliation without any Republican support.

“That's a fairly ambitious [proposal],” Gleckman said. “I don't think they're going to get that much, but that’s a very ambitious start.”

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova

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