The Biden administration’s proposal to impose a combined 44.6% tax rate on wealthy Americans’ income, long-term capital gains and qualified dividends is sending shockwaves through financial markets and the wealth management industry today.

The proposed taxes are explained in a footnote of the administration’s report, “General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals,” which includes a $73 trillion budget: “A separate proposal would first raise the top ordinary rate to 39.6% … An additional proposal would increase the net investment income tax rate by 1.2 percentage points above $400,000. … Together, the proposals would increase the top marginal rate on long-term capital gains and qualified dividends to 44.6%.”

A number of wealth managers said they question the logic of using higher long-term capital gains and dividends taxes to generate federal revenue.

“If Biden actually did raise rates to 44.6%, there would be less trading and therefore less revenue. The bottom line, those with means will change strategies. It will be a populist ‘win’ without generating more revenue to federal coffers, thus increasing and not reducing deficits,” said Scott Bishop, a co-founder of Presidio Wealth Partners in Houston.

It’s worth noting that historically capital gains tax cuts have generated greater revenue, the veteran advisor said. “When President George W. Bush cut the capital gains rate to 15% from 28%, it actually boosted the revenue received as people took advantage of the lower rate to sell capital assets at the lower rates,” Bishop said.

Bishop said that wealthy individuals could already reduce their capital gains by holding securities until they die (where there’s a step-up in basis), or by giving assets to family members in lower tax brackets or otherwise “donating to charity and/or having asset-backed lines of credit to borrow against appreciated assets, for liquidity without selling. They also use exchange funds for diversification without selling,” he said.

The Biden administration is hailing the taxes as a strategic redirection of America’s tax policy. By proposing a substantial increase in the capital gains tax rate for high earners and revising related tax regulations, the administration told reporters it wants to foster a more equitable tax environment that will allow for funding more social programs and address the growing fiscal deficit. By taxing long-term capital gains and qualified dividends at ordinary income rates for high earners, the administration is hoping to align the tax rates on wage income and investment income. Some of the super-rich like Bill Gates have also suggested raising the rate on capital gains taxes as a more efficient way to address income equality than many other ideas.

The proposal raises the federal capital gains tax rate from 20% to 39.6% for individuals earning more than $1 million annually. Additionally, the net investment income tax would increase from 3.8% to 5% for those with incomes above $400,000, culminating in a top effective rate of 44.6% for some high earners.

GOP Backlash
The plan sparked anger across the political aisle. The GOP-led House Budget Committee, lambasted Biden’s $7.3 trillion fiscal 2025 budget, which includes both a $4.9 trillion tax hike and an “unprecedented $86.6 trillion in spending” over 10 years.

The committee estimated the plan would lead to the “largest debt in American history” at $54 trillion by 2034, according to a statement.

Donald Trump’s presidential campaign accused Biden of proposing the “largest tax hike ever” on Americans facing “record-high inflation.” The campaign estimated the plan would cost every American family $40,000.

“It would certainly have a negative effect on clients and the market, and change long-term financial planning” said Chris Mankoff, a chief portfolio strategist at JTL Wealth Partners, an LPL Financial affiliate in Roanoke, Texas.

“It is hard to imagine that such a proposal is passed, but in the event it does, I would have to assume that it would be modified by another administration,” Mankoff added.

The nonpartisan Tax Foundation said “the tax increases would substantially increase marginal tax rates on investment, saving and work, reducing GDP by 2.2% in the long run, capital stock by 3.8%, wages by 1.6% and employment by about 788,000 full-time equivalent jobs. The budget would decrease American incomes (as measured by gross national product, or GNP) by 1.9% in the long run, reflecting offsetting effects of increased taxes and reduced deficits, as debt reduction reduces interest payments to foreign owners of the national debt,” the think tank said.

David W. Demming, president of Demming Financial Services in Aurora, Ohio, called the capital gains and dividends taxes “counterproductive.”

“Long-term capital gain treatment under the tax code has clear economic motivations,” Demming said. “Incentivizing investors with a 40% to 50% tax discount, as the current tax system does, is there to encourage investment in our economy, ergo creating jobs and economic development.”

On the positive side, such taxes would shift investors’ focus to tax-deferred accounts, “which would be positive for retirement planning, and add additional focus on making sure that investors have a great tax planning strategy for their investments and be proactive in their tax planning,” Mankoff added.