Is the third time the charm for a White House budget proposal to create a 45% tax on capital gains for households earning more than $400,000 annually and a 25% tax on the unrealized capital gains on those with net worths of $100 million or more?
The Biden-Harris administration has proposed the taxes twice before and multiple reports this week said Democratic presidential nominee Kamala Harris supports the tax increases put forth in Biden’s most recent budget proposal in March. The capital gains taxes, along with a 28% corporate tax rate Harris proposed earlier this week, a 25% minimum tax rate on certain high-income individuals and an alternative minimum tax rate increase from 15% to 21% would increase taxes and raise revenues by $5 trillion over 10 years, according to the Congressional Budget Office.
If enacted, it would be the highest formal federal capital gains rate since its inception in 1913, according to PriceWaterhouseCooper (PwC) analysis. Currently, taxpayers pay a capital gains rate ranging from 0% to 20% if they hold on to an asset for more than a year. Assets sold within a year or less of ownership are subject to regular income tax rates, ranging from 10% to 37%. Depending on where they live, additional state taxes may apply.
Since the 1980s, capital gains tax rates have generally remained between 20% and 30%. Under the Reagan administration, they were cut to 20% in 1981 before being raised to 28% in line with the income tax rate as part of the 1986 tax reform act. In 1997 under the Clinton administration, capital taxes were reduced back to 20%.
However, as with any policy proposal, the reality behind the numbers is more complex than it appears, Price Waterhouse Coopers said.
Proponents of taxing the wealthy say the wealthy don’t pay their fair share, that the money is needed to enact the next president’s policy agenda and that the U.S. tax code already taxes assets such as real estate before they’re sold, according to Pew Institute analysis.
Ostensibly, such tax revenues could be earmarked to pay for the subsidies and tax credits Harris proposed last week, including a $3,600 per child tax credit (or up to $6,000 in total benefits for middle- and low-income families during the first year of a child's life), a $25,000 down payment subsidy and $10,000 tax credit for first-time homebuyers and a variety of other expenditures.
Critics argue the capital gains taxes could be a death knell for investing and business formation in the U.S. They also say the taxes could be potentially crippling for those who have most or all of their money tied up in highly appreciated assets—such as family-owned businesses and farms—potentially forcing them to borrow, or if unable borrow, to be forced to sell their businesses to pay taxes.
Harris’s tax increases “will hit households in the form of diminished wage growth and higher costs of goods and services. These Harris tax increases will make the U.S. less competitive vs. our adversaries,” Mike Palicz, director of conservative think tank Americans for Tax Reform, warned in a blog.
Wealth manager David Demming, president of Demming Financial in Aurora, Ohio, agreed, characterizing Harris’s call for a higher capital gains tax rate and an unrealized capital gains tax a “very ignorant proposal. Long term capital gains treatment has a long historical precedent of giving a 40% to 50% tax benefit. Why? Because, it creates jobs, strengthens the economy and our country."
However, as with any policy proposal, the reality of higher taxes will depend on Congress, Price Waterhouse Coopers (PwC) said. “President Biden was unable to gain support for many of his key corporate and individual tax proposals during his first two years in office, when Democrats narrowly controlled both the House and Senate," PwC said. "The Senate in particular became a stumbling block and the outcome could have been significantly different if his party had held even one more seat in the Senate at that time."
Indeed the race for both the White House and the House and Senate will determine tax policy.
“Currently Democrats control the Senate by a 51-49 seat margin, including four independent senators who caucus or align with the party,” PwC said. The margins are so tight in the Senate, Harris has routinely been called to cast the tie-breaking vote on legislation.