Biden's 44.6 Percent Capital Gains Tax Proposal a 100-Year High

 

President Joe Biden's proposal to increase the top capital gains tax rate could be the highest such tax rate in over a century.

In his 2025 budget proposal, Biden outlined plans to elevate the top marginal rate on long-term capital gains and qualified dividends to 44.6%. This rate, if enacted, would surpass any seen in over a century, according to Americans for Tax Reform (ATR). 

Moreover, the combined federal-state rate could exceed 50% in several states when factoring in state capital gains taxes. For instance, California residents would potentially face a 59% rate, while those in New Jersey, Oregon, Minnesota, and New York could confront rates ranging from 53.4% to 55.3%, according to ATR.

Critics of the proposal argue that capital gains taxes, particularly when not indexed to inflation, impose a form of double taxation and disproportionately affect certain demographics. Small business owners, for example, may find themselves grappling with inflated tax liabilities on gains that are partly attributable to inflation rather than real profit.

Furthermore, comparisons with other nations highlight the potential ramifications of such a steep increase. China, for instance, maintains a capital gains tax rate of 20%, significantly lower than Biden's proposed rate. The prospect of imposing higher taxes than a major economic competitor raises concerns about the impact on investment and economic competitiveness.

The history of the capital gains tax underscores the magnitude of Biden's proposal. Initially introduced in 1922 at a rate of 12.5%, the tax has evolved over the decades but has never approached the proposed levels.

Additionally, Biden's plan includes measures to address tax implications upon inheritance, potentially adding further complexity to the tax code. The proposal to eliminate a stepped-up basis upon the transfer of assets upon death could result in a mandatory capital gains tax event, affecting families' financial planning and estate management.

"When someone dies, and the asset transfers to an heir, that transfer itself will be a taxable event, and the estate is required to pay taxes on the gains as if they sold the asset," said Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center, CNBC reported.

The budget proposal, which calls for approximately $5 trillion in tax increases over the next decade, has drawn mixed reactions from lawmakers and experts alike. While some argue that such measures are necessary to fund various social programs and infrastructure projects, others express concerns about the potential adverse effects on economic growth and investment.

And don’t forget to add the state capital gains tax: the Biden combined federal-state rate would exceed 50% in many states

Here is a direct quote from the Biden 2025 budget proposal: “Together, the proposals would increase the top marginal rate on long-term capital gains and qualified dividends to 44.6 percent.”

Yes, you read that correctly: A Biden top capital gains and dividends tax rate of 44.6%.

Under the Biden proposal, the combined federal-state capital gains tax exceeds 50% in many states. California will face a combined federal-state rate of 59%, New Jersey 55.3%, Oregon at 54.5%, Minnesota at 54.4%, and New York state at 53.4%.

Worse, capital gains are not indexed to inflation. So Americans already get stuck paying tax on some “gains” that are not real. It is a tax on inflation, something created by Washington and then taxed by Washington. Biden’s high inflation makes this especially painful.

Many hard working couples who started a small business at age 25 who now wish to sell the business at age 65 will face the Biden proposed 44.6% top rate, plus state capital gains taxes. And much of that “gain” isn’t real due to inflation. But they’ll owe tax on it.

Capital gains taxes are often a form of double taxation. When capital gains come from stocks, stock mutual funds, or stock ETFs, the capital gains tax is a cascaded second layer of tax on top of the current federal corporate income tax of 21%. (Biden has also proposed a corporate income tax hike to 28%).

Biden’s proposed capital gains tax hike will also hit many families when parents pass away. Biden has proposed adding a second Death Tax (separate from and in addition to the existing Death Tax) by taking away stepped-up basis when parents die. This would result in a mandatory capital gains tax at death — a forced realization event.

As previously reported by CNBC:

“When someone dies and the asset transfers to an heir, that transfer itself will be a taxable event, and the estate is required to pay taxes on the gains as if they sold the asset,” said Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center. 

Biden’s proposal to take away stepped-up basis has already been tried, and it failed: In 1976 congress eliminated stepped-up basis but it was so complicated and unworkable it was repealed before it took effect.

As noted in a July 3, 1979 New York Times article, it was “impossibly unworkable.”

NYT wrote:

“Almost immediately, however, the new law touched off a flood of complaints as unfair and impossibly unworkable. So many, in fact, that last year Congress retroactively delayed the law’s effective date until 1980 while it struggled again with the issue.“

As noted by the NYT, intense voter blowback ensued:

“Not only were there protests from people who expected the tax to fall on them — family businesses and farms, in particular — bankers and estate lawyers also complained that the rule was a nightmare of paperwork.“

Biden’s 2025 budget calls for about $5 trillion in tax increases over the next decade.

Follow the author on Twitter @JohnKartch

To learn more about Biden’s many tax increases, visit ATR.org/HighTaxJoe

Click here for a printable PDF of the Capital Gains Chart

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