In order to pay for his ambitious plans for infrastructure, climate, and anti-poverty measures, President Biden promised to raise taxes on the wealthiest Americans. Now, the details of those increases, which have yet to be formally announced, are coming into focus. And they’re great news for middle-class earners who could gain to get a lot more out of their government in terms of social services, like child care, education, and universal pre-k.
Bloomberg reports that Biden’s plan would double the capital gains tax rate to 39.6 percent for the wealthy. Coupled with the existing 3.8 percent surtax on investment income that helps fund the Affordable Care Act, wealthy investors could pay as much as 43.4 percent on the profits when they sell stocks.
Who Do The Tax Hikes Affect?
It’s important to note that capital gains taxes are only levied on the shareholder profit, the difference between the value of the stock when purchased and the value of the stock when sold. And assuming the brackets don’t change, this rate would only apply to capital gains over $441,450 for individual filers and $496,600 for joint filers.
Only 55 percent of Americans own any stocks, and the vast majority of those will not realize capital gains anywhere close to those thresholds. Currently, capital gains up to $40,000 are taxed at exactly zero percent, and there’s no indication that Biden wants to raise that rate.
How Much Money Would The New Rules Raise?
The bigger significance of this tax increase, besides raising an estimated $370 billion over the next decade, is how it would effectively close the carried interest loophole for wealthy investors.
Carried interest is “a share of any profits that the general partners of private equity and hedge funds receive as compensation regardless of whether they contribute any initial funds.” Because those profits are made on the stock market, carried interest is treated as a capital gain and not wage income by the tax code. Currently, that means paying a maximum rate of 20 percent instead of the 37 percent maximum rate on income.
This is the carried interest loophole, something that has cost the United States Treasury billions and resulted in rich investors paying a much lower tax rate than lower- and middle-income folks. By bringing the capital gains rate closer in line to the income tax rate, Biden would eliminate the carried interest loophole for fund managers who make more than $1 million.
The tax plan would raise a ton of money for programs like President Biden’s push for federal child care, universal pre-kindergarten, affordable education, and other social programs that will help American families survive and thrive.