Biden wants to hit wealthy Americans with new tax hikes to fund childcare and education. Here's what it could mean for you.
Biden wants to levy new taxes on wealthy Americans to fund sweeping childcare and education programs.
The vast majority of US households - 98%, by Penn Wharton's calculations - isn't likely to experience a tax hike.
The top marginal income tax could be raised, along with the capital gains tax.
President Joe Biden is preparing to unveil a new set of tax hikes on the richest Americans to fund a collection of new education and childcare programs.
The New York Times and Bloomberg reported on Thursday these tax increases will be central to financing Biden's latest infrastructure plan, in line with the "Build Back Better" agenda he outlined during the campaign.
The so-called American Families Plan may come in at around $1.5 trillion in new spending aimed at curbing poverty, expanding tax credits for families, and establishing a new universal pre-K initiative. That's on top of the $2.3 trillion proposal called the American Jobs Plan that focuses on roads, broadband, in-home elder care, and domestic manufacturing. The White House has so far ruled out any tax hike on people earning below $400,000 annually.
Among the tax hikes the White House is eyeing: Raising the top marginal income tax rate to 39.6% from 37%, and doubling the capital gains tax for Americans earning above $1 million to 39.6% from 20%. This latter change would tax investment gains at the same rate as wages. Combined with a 3.8% surtax that's already levied on wealthy investors to fund the Affordable Care Act, it could lift the overall tax rate on capital gains as high as 43.4%.
Biden's campaign promise to shield households earning below $400,000 annually from tax increases only opens the top 2% of US households to new taxes as part of his agenda, per an estimate last year from the Penn Wharton Budget Model. The vast majority of Americans are not likely to experience one.
Indeed, the higher capital gains tax rate would hit only the wealthiest investors. IRS data from 2018 indicated only 0.32% of US taxpayers reported adjusted gross incomes higher than $1 million and capital gains or losses on their tax returns.
Administration officials are defending the tax hikes ahead of the plan's introduction next week. White House Chief of Staff Ron Klain tweeted the taxes on investors would affect only a sliver of Americans, or less than 1%.
-Ronald Klain (@WHCOS) April 23, 2021
Still, it's possible centrist Democrats may balk at ramping up taxes on investors. Greg Valliere, chief policy strategist at AGF investments, projected the capital gains tax would rise to a lower level after congressional negotiations.
"It's entirely possible that the top capital gains rate for millionaires will rise from 23.8% now to something like 30%," he wrote in a blog post. "Most of the administration's proposals will get watered down later this year."
UBS Global Wealth Management's Solita Marcelli wrote in a note published Friday that lawmakers will ultimately settle on a capital gains tax rate of 28%.
While also noting many families will not be subject to the higher capital gains tax being proposed, she wrote options will remain for people making $1 million or more from capital gains. "If you are able to defer your capital gains taxes to years where your taxable income is below the proposed USD 1 million threshold, it may be possible to continue paying the current long-term capital gains tax rate of 23.8%," she said.
Separately, she found no likely impact on the stock market from the news: "History shows no relationship between capital gains tax rate changes and stock market performance."
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