This is how Democrats want to raise taxes on the rich
House Speaker Nancy Pelosi, a California Democrat, wears protective masks as she speaks during an event in the Rose Garden of the White House in Washington, DC on Friday, March 12, 2021.
Jim Lo Scalzo | Bloomberg | Getty Images
Democrats could soon raise taxes on the rich as lawmakers prioritize beyond pandemic relief.
According to tax experts, a change in the way Uncle Sam taxes the wealth, capital gains and estates of the super-rich could be on the table.
The White House and Congress Democrats have envisaged higher taxes to generate trillions in extra revenue, for example to improve the country’s infrastructure and combat climate change.
President Joe Biden and his advisors are considering spending up to $ 3 trillion in new spending on such efforts, the New York Times reported Monday.
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There is a chance that sweeping changes to tax law will not occur, especially if they require Republican support. But the richest Americans can expect at least some kind of tax hike, experts said.
“The question that we are really dealing with now is not whether tax rates will rise, but when and what taxes?” said Alison Hutchinson, managing director and senior wealth planner at Brown Brother Harriman in New York.
Capital gains taxes
At its core, Biden’s tax plan focuses on increasing taxes for Americans who earn more than $ 400,000 (it’s still unclear if this applies to families or individuals). For example, the plan would increase the highest income tax rate and tax more of their income for social security.
And Biden would continue to raise royalties on millionaires and billionaires.
For example, he wants to tax long-term capital gains at the same tax rate as wages for households making more than $ 1 million a year.
Wealthy Americans currently pay a 37% wage rate and a lower 20% rate on investment income (plus a 3.8% surcharge).
The Biden tax plan would increase capital gains tax for millionaires to 39.6% – the same rate the president would tax labor income for high earners.
Treasury Secretary Janet Yellen told the Senate in January that this change in capital gains taxes was a long-term goal for the Biden administration.
“We recognize that our tax system cannot be geared towards corporate interests and the rich, while those who are mostly borne by wages carry an unequal burden,” she said on a written testimony during her confirmation hearing.
However, the capital gains policy could go beyond the consistently rich.
This could happen if, for example, a business owner who makes $ 75,000 a year sells their business for more than $ 1 million, said Robert Keebler, a tax advisor and auditor based in Green Bay, Wisconsin.
“You could argue that this is fair to a Wall Street tycoon who makes a lot of money every year, but it doesn’t seem that fair to a man who sells his business for a year,” Keebler said.
Estate tax rules
Biden has also proposed changing the rules on capital transfers, such as estate and gift taxes.
Under current law, heirs receive an asset, such as a stock or a home, at its current market price (rather than the original owner’s cost) thanks to a “top-up” at death.
This allows the heir to sell the asset without paying taxes on the increase in value over the life of the owner.
During the campaign, Biden said he would remove the base increase.
If Congress can’t agree on anything, that would happen anyway.
Attorney at Kleinberg, Kaplan, Wolff & Cohen
It would also reduce the amount that individuals can transfer without paying estate and gift taxes to $ 3.5 million in estates on death and $ 1 million in lifelong gifts. There is also a possibility that Biden will increase the tax rate from the current 40%, said Bruce Steiner, attorney at Kleinberg, Kaplan, Wolff & Cohen.
The Tax Cut and Jobs Act raised the tax exemption threshold for individuals to $ 11.7 million in 2017. This threshold will be reset to the upper limits prior to TCJA in 2026 due to the statutory expiration provisions.
This means that in a few years, more properties (which are over $ 5.5 million for individuals) will automatically be subject to capital transfer taxes.
“If Congress can’t agree on anything, that would happen anyway,” Steiner said.
Senator Elizabeth Warren, D-Mass., Holds a press conference in Washington March 1, 2021 to announce laws aimed at taxing the wealth of America’s richest people.
Chip Somodevilla | Getty Images News | Getty Images
Biden did not propose an annual tax on total wealth. Politics, however, is on the wish list of some more liberal members of the House and Senate.
Sen. Elizabeth Warren, D-Mass .; Sen. Bernie Sanders, I-Vt .; and eight other Democrats proposed the Ultra Millionaire Tax Bill in early March.
The bill would impose a 2% wealth tax on the net worth of households and trusts between $ 50 million and $ 1 billion. The tax would be 3% on anything over $ 1 billion.
According to Emmanuel Saez and Gabriel Zucman, economists at the University of California at Berkeley, about 100,000 Americans would be subject to wealth tax by 2023. Politics would make at least $ 3 trillion in a decade, they noted.
“If people pan the Warren property tax broadly and say the likelihood is slim, I agree that the first cut will not be approved by Congress,” Hutchinson said. “But I think tax planners need to focus on these types of proposals because something like this could very well come through.”