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President Joe Biden has unveiled a proposal in his 2025 budget that would raise the top marginal rate for long-term capital gains and qualified dividends to an unprecedented 44.6%. This proposal would set the capital gains tax at the highest rate the country has seen in over a century.
Currently, capital gains taxes are levied on gains from the sale of assets, such as stocks or real estate, that have increased in value over time. According to the budget proposal, the increase is intended to ensure “that wealthy individuals make a fairer contribution to the economy.”
However, this change does not occur in isolation. Combined with state-level capital gains taxes, the total tax burden in states like California could reach as high as 59%, while other states like New Jersey, Oregon, Minnesota and New York also have tax rates above 50%.
Main concern
This proposed tax increase has raised concerns among investors and business owners, particularly those considering selling businesses they have supported from the start. Typically, capital gains are not adjusted for inflation, meaning that taxes could be imposed on economic gains that do not represent actual increases in purchasing power. This aspect of the tax code becomes particularly contentious during times of high inflation, such as the current economic climate, because it is effectively a tax on inflation-related “gains.”
Additionally, the tax structure surrounding capital gains often results in what many consider to be double taxation. For example, gains from investing in company stock are taxed at the company level and then again at the individual level when gains are realized. The Biden administration has also put forward a proposal to increase the corporate tax rate from 21% to 28%, further increasing the tax burden on investments.
The international perspective adds another dimension to the debate. In comparison, under Biden's proposal, the United States would have a significantly higher top capital gains tax rate than countries like China, where the rate is 20%. Critics argue that such a high tax rate could undermine the United States' competitive position in attracting and retaining capital investment.
Finally, there is no plan to reduce federal spending, which has reached unprecedented levels in the United States.
History of Capital Gains Tax
Historically, capital gains tax was introduced in 1922 at a rate of 12.5%. The dramatic increase proposed in President Biden's budget underscores a bold shift in tax policy, but is not without precedent.
Similar initiatives have faced strong opposition in the past, such as in 1976 when Congress attempted to eliminate the graduated tax basis – a method of adjusting the value of an inherited property for tax purposes. The complexity and resistance from various stakeholders led to it being repealed before implementation.
To add to the complexity, Biden's budget proposal proposes a new form of death taxation by eliminating the enhanced tax base and imposing a mandatory capital gains tax on inherited assets. This has been likened to a second “death tax” and, if implemented, could have a significant impact on the estate planning and financial legacies of many American families.
Currently, the highest tax brackets for capital gains are 37% for short-term gains and 20% for long-term gains.
Summary
The Biden administration's initiative, part of a broader goal of generating about $5 trillion in tax revenue over the next decade, sets the stage for an intense debate about the future of investment and wealth distribution in the United States.
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