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The super-rich could cheer the Democrats’ proposed tax reforms on investment income versus the Biden government’s earlier plan.
The White House asked for a top tax rate of 39.6% on long-term capital gains and dividends – almost double the current 20%.
Long-term capital gains tax applies to assets such as stocks and homes that have grown in value and have been owned for at least a year; Taxpayers owe money to increase in value when they sell an asset. A dividend tax applies to profit distributions that companies make to their shareholders.
Biden’s policies would only apply to the richest Americans – the top 0.3% or those with incomes of $ 1 million or more. It would be one of the highest capital gains and dividend rates in the developed world.
But House Way and Means Committee legislation unveiled Monday would tax capital gains and dividends at a much lower top rate of 25%. The House of Representatives proposal would apply to single parents with an income of at least $ 400,000 and married couples to $ 450,000.
Put another way, Biden’s plan would have increased the highest federal tax rate for the richest Americans by 98% (compared to current law), while the House of Representatives proposal would have increased it by 25%. The House of Representatives plan would also raise taxes for a wider segment of the population.
“This change is AWESOME for the super-rich,” wrote Jeffrey Levine, an accountant and certified financial planner who serves as chief planning officer at Buckingham Wealth Partners, in a tweet.
“But for the ‘just’ wealthy taxpayer? Not so much,” he added.
An existing Medicare surcharge of 3.8% and government levies would be added to any change in the federal rate.
Investment income
Compared to low and middle earners, the wealthy generate more income from investments than from wages.
For example, the top 0.1% who earn $ 3.4 million or more get more than half of their annual income from capital gains, dividends, and interest; a quarter comes from wages and social benefits, according to a 2019 analysis by the Tax Policy Center.
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For comparison: According to the analysis, wages and social benefits make up around 60 to 70% of annual income for taxpayers outside the richest 1%.
“[The House proposal] is obviously not as punitive in their view as the original proposals, “said James Hines Jr., economics professor and research director for the University of Michigan Office of Tax Policy Research, of the rich.
Of course, wealthy Americans do not cheer for any of the proposals; They would probably prefer their tax rate not to be increased at all, Hines said.
Capital gains in the event of death
The plans also differ in how they would tax inheritances that have greatly appreciated in value.
Biden’s plan would tax the increase in value of an asset upon the death of its owner. This is to prevent the super-rich from constantly passing on stocks and other financial assets to the next generation for little or no tax.
(Capital gains less than $ 1 million for single parents and $ 2.5 million for married couples would be excluded.)
The House’s plan preserves the status quo that does not impose this tax on death. Applicable law also allows heirs to receive an asset at its current value, which erases the paper profit and thereby dilutes their future tax bill when they sell.
The richest families receive the largest inheritances – an average of $ 719,000 at the time of inheritance, according to the Federal Reserve’s consumer finance survey. (The average for all Americans is $ 46,000.)
The inheritances are not necessarily due to capital gains. But a significant portion of the economic gains made by the richest Americans come from unrealized capital gains, according to the Federal Reserve. About 41% of the top 1% have an unrealized capital gain.
Of course, the final legislation could ultimately change from both House and Biden proposals as Democrats try to raise up to $ 3.5 trillion in funding for education, healthcare, childcare, climate, paid vacation, and other measures collect.
“We’re in the second or third inning now,” said Leon LaBrecque, accountant and certified financial planner with Sequoia Financial Group.
