April 26, 2021
White House National Economic Council Director Brian Deese on Monday said that President Joe Biden’s plan to increase the capital gains tax rate would only affect a sliver of taxpayers.
“We’re talking about the [top] three-tenths of one percent [of all taxpayers], that’s about 500,000 households,” he said, adding, “This is not a change that will be relevant [to the other taxpayers]. It won’t change their tax treatment of capital gains at all.”
President Joe Biden in his upcoming speech to a joint session of Congress on April 28, 2021, is expected to lay out a plan that will raise the capital gains tax to 43.4% for individuals earning more than $1 million a year. This number includes the 3.8% Net Investment Income Tax (NIIT).
One reason for the change is that some millionaires pay a lower tax rate than middle-income earners, according to Deese.
“They have only paid about 20% of their reported income in taxes,” he said. “So, their tax rate – which is probably overstated because this is the category that doesn’t report or under reports income – their tax rate is lower than many middle-class tax rates.”
Biden is also expected to create parity between taxing capital gains and income by increasing the top income tax rate from 37% to 39.6%, which would amount to 43.4% when the NIIT is included.
“We’re talking about a tax change that will equalize treatment of income and capital gains,” Deese said, adding that the last effort to align these two revenue streams was done by President Ronald Reagan.
“Of course, we will be raising higher rates than in that reform,” Deese said.
The Tax Reform Act of 1986 lowered the top income tax rate from 50% to 28%, and raised the maximum tax rate on long-term capital gains from 20% to 28%. Biden’s plan is expected to increase the top income tax rate a few points and nearly double the top capital gains tax rate.
Deese did not confirm the level of taxation on capital gains that Biden will propose later this week, but he did say that the increase would not affect investment activity.
“Across a wide body of academic and empirical evidence, there is no evidence of a significant impact of capital gains rates on the level of long-term investment in the economy,” Deese said.
While the details of Biden’s tax plan have not been released, it has been subject to scrutiny.
A report from the University of Pennsylvania’s Wharton School found that raising capital gains taxes to the level desired by Biden would decrease the amount of revenue raised by the federal government by $33 billion between 2022 and 2031. However, if the rate increase was paired with eliminating the step-up in basis, $113 billion would be raised over the same time period.
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