Biden tax plan would bring rich $ 1.5 trillion
President Joe Biden addresses a joint session of Congress in Washington on April 28, 2021.
Mélina Mara | Reuters
Taxes could soon increase for the rich.
President Joe biden aims to fund expanded education, child care, paid vacation and other reforms by raising more tax revenue from Americans who earn more than $ 400,000 a year.
It would do this by raising the highest tax rates on income and capital gains, changing the taxation of wealthy estates, closing so-called tax loopholes, and focusing audits of the wealthy to prevent tax evasion. .
All in all, the American Family Plan would raise $ 1.5 trillion over a decade by taxing the highest incomes, according to the White House.
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“I think you should be able to become a billionaire or a millionaire,” Biden told Congress Wednesday night in a speech outlining his agenda. “But pay your fair share.”
The richest 1% of taxpayers, who have an average income of $ 2.2 million, would bear the burden of the tax hike, according to a analysis published by the Institute of Taxation and Economic Policy.
Two-thirds of this group would see their taxes increase, by an average of $ 159,000 per year, according to the analysis.
Of course, the proposal faces headwinds in Congress. Passage is not guaranteed and parts of the plan may change.
Biden’s tax plan would raise the top tax rate to 39.6%.
This was the highest rate before the Tax Cuts and Jobs Act of 2017, which lowered it to 37% currently.
The 39.6% rate would apply to the richest 1% of Americans, according to the White House.
According to Garrett Watson, senior policy analyst at the Tax Foundation, households with incomes over about $ 540,000 are among the richest 1% of taxpayers.
However, the precise income thresholds at which the 39.6% rate would go into effect for single taxpayers and married spousal filers are unclear.
They would likely correlate with the current peak rate of 37%, Watson said. This rate applies to incomes over $ 523,600 for single tax filers and $ 628,300 for married couples.
This aspect of Biden’s proposal would raise about $ 110 billion over a decade, according to the Tax Foundation.
Biden is essentially speeding up a future tax code change – the highest tax rate is already expected to drop to 39.6% after 2025, by language in the tax cuts and jobs law.
America’s Families Plan would also change the way the rich pay ROI taxes in two important ways.
“These parts of the proposal, for me, would have the most impact on the wealthiest people,” said David Herzig, director of Ernst & Young’s private client services tax group.
On the one hand, Biden’s plan would raise the top tax rate on long-term capital gains to 39.6% – the same rate as their wages. (Including a 3.8% Medicare surcharge, they would pay a maximum rate of 43.4%.)
This would be an increase from the current 20% (or 23.8%, including the surtax on net investment income).
The policy applies to taxpayers with annual income over $ 1 million – the richest 0.3% – who sell stocks, bonds and other assets held in taxable accounts for gain.
The rich get a much larger share of their annual income from investments compared to those with low incomes.
Investments account for more than 40% of the income of taxpayers who earn at least $ 1 million a year, according to an analysis by the Tax Foundation. The other sources (business income and salaries) represent lower shares respectively.
In comparison, Americans who earn less than $ 50,000 per year earn about 5% of their income from investments. Salaries represent over 80%.
“This will force people to think a little more when they decide to sell and reallocate to another opportunity because of this tax grab,” Watson said.
The plan also changes the way wealthy estates pay tax on assets appreciated on death – the second big part of Biden’s capital gains tax reform
The President would remove the so-called base increase on death for any gain over $ 1 million.
Essentially, the appreciation of any unsold asset – also known as unrealized gains – would be subject to capital gains tax upon the death of the owner. (Again, that could reach 43.4% for the richest households.)
This regime would be very different from the current law.
Currently, the capital gain of an asset is not taxed on death. The asset benefits from a base increase, which means that it is transferred to the heirs at its current market value, thus wiping out the capital gain. The heirs could then sell the asset without capital gains tax.
(Single estates may owe a 40% federal inheritance tax on assets exceeding $ 11.7 million. The threshold is $ 23.4 million for married couples.)
“It’s not the inheritance tax,” said Gordon Mermin, senior research associate at the Urban-Brookings Tax Policy Center, of Biden’s proposal. “It’s just taxing those earnings that have never been taxed.”
Wealthy estates could miss $ 1 million in tax gains on death. (It would be $ 2 million for couples.)
This exclusion would be in addition to the existing tax relief for valued real estate. (Single taxpayers can exclude capital gains of up to $ 250,000 from tax; that’s $ 500,000 for married couples.)
Let’s say a wealthy couple bought a $ 5 million house that was worth $ 10 million at the time of their death. The estate can exclude half of this $ 5 million gain from tax and would pay tax on the remaining $ 2.5 million.
“The exclusion here is high enough to really target high earners,” Watson said.
Family businesses and farms would also benefit from an exclusion – they would not have to pay tax when the business or farm passed to heirs who continue to run the business, according to the White House.
It’s unclear how Biden’s proposal to tax unrealized gains on death would interact with federal estate tax, experts said. (For example, could taxes paid on unrealized gains be deducted from the size of the entire estate?)
“There are a lot of operational questions about how this might work,” Herzig said.
The White House would also allocate additional resources to the IRS to improve tax audits of households with more than $ 400,000 in income.
Audit rates on those earning more than $ 1 million a year fell 80% between 2011 and 2018, according to IRS data cited by the White House, which said its plan for enforcement would raise $ 700 billion over a decade.