The highest federal capital gains tax rate could reach levels not seen since the 1970s under the House Democrats’ proposal., according to a new report.
This plan would increase the so-called marginal capital gains rate – what investors pay when they profit from the sale of a stock, bond, or other asset – to 31.8% at federal level. But since most states also tax capital gains, the average rate for the country’s richest investors would rise to 36.8% and exceed 40% in states like California and New York, the Tax analysis concludes. Foundation, an independent tax policy center known for opposing tax increases.
Currently, the top federal capital gains rate is 20% for people earning over $ 400,000. Here’s how the House Democrats’ plan could push that rate to 31.8% for some investors.
The highest long-term capital gains rate would rise to 25%, while the 3.8% Medicare surcharge for high-income investors would raise that rate to 28.8%. Democrats are also proposing to add a 3% surtax on annual income of $ 5 million or more.
On top of that, states add their own capital gains taxes, with wealthy residents of six states facing combined capital gains rates above 40%, the Tax Foundation said. High net worth investors in California would face the highest combined marginal capital gains rate, at 45.1%.
Raising tax rates for wealthy Americans and big business is at the heart of Democrats’ plan to raise revenue to fund an ambitious list of infrastructure and social programs, ranging from extending theto provide new incentives for investment in clean energy. But the Tax Foundation said the plan could backfire if some investors decide not to sell assets to avoid paying significantly higher capital gains tax.
“The way our capital gains tax system works is that if you own a stock and its value increases and appreciates, you don’t pay tax until you sell and realize that gain. Said Erica York, economist at the Center for Tax Foundation. Federal tax policy that worked on the analysis. “Research indicates that when you get north of 28% [for a capital gains tax rate], taxpayers avoid making gains. “
If high net worth investors forgo selling assets, it could reduce the projected income the federal government would collect under the higher tax rate, she added.
Certainly, such concerns represent a big if, given that investors base their decisions to sell stocks and other assets on a number of reasons other than taxes, such as concerns about the stock market during the pandemic or a desire to transfer assets due to economic or industrial conditions. Others may need to sell a home to move, which can also trigger capital gains tax.
Interestingly, the Democrats’ proposal does not eliminate the so-called “base increase” loophole, which adjusts the purchase price of an asset to its value on the day a person dies. which effectively allows heirs to avoid paying capital gains. the tax on the property they inherit. This could play a role in inheritance decisions, some tax experts have noted.
“This will encourage some investors to hold onto their assets until death so they can pass them on untaxed to their heirs,” Howard Glickman of the Urban-Brookings Tax Policy Center noted in a blog post.
“The untaxed growth of fabulous fortunes”
Notably, most investors would not pay the highest capital gains rate under the Democrats’ proposal because the 25% rate and the 3.8% Medicare surtax would apply to people with incomes. annuals are over $ 400,000, according to Brian Gardner, the chief Washington policy strategist for investment bank Stifel.
Meanwhile, only people earning more than $ 5 million a year would pay the additional 3% tax. IRS data shows that only 35,000 tax returns out of 154 million tax returns in 2019 reported income in excess of $ 5 million.
Most low- and high-income taxpayers would not see their capital gains tax rate change. Under the proposal, tax rates would remain either at 0% for people earning up to about $ 40,000 a year, or 15% for people earning between $ 40,000 and about $ 400,000.
Some critics say the tax plan is insufficient and should raise taxes for wealthy Americans even more, as billionaires enjoyed huge wealth gains during the pandemic due to the stock market surge. Americans on the Left for Tax Fairness said the Democrats’ tax plan “does not go far enough or address the country’s greatest source of economic inequality: untaxed growth of fabulous fortunes.”
In the 1970s, the highest rate of surplus value ranged in the 30% range and finally peaked at 35% in 1979, according to a study by Wolters Kluwer. But the wealth of the richest people is much greater today than in the 1970s, when income inequalities widened. From 1945 to 2015, the average tax rate for the richest 1% of households fell from around 40% to 25%, according to a study by the Tax Policy Center.
“Debates over measuring effective tax rates have been heated because measuring taxes and income is complex and involves appeals for judgment (and the political stakes are high),” noted Robert McClelland, senior researcher at Tax Policy Center, in the report.