Biden’s Capital Gains Tax Proposal: An Objective Look
STRENGTHEN TAXATION OF HIGH-INCOME TAXPAYERS
Current Law:
Households with modified adjusted gross incomes over a threshold amount are subject to a 3.8% Net Investment Income Tax (NIIT). The threshold is $200,000 for single and head-of-household filers and $250,000 for joint returns. The tax does not apply to self-employment earnings.
Reasons for Change:
Inconsistencies in the taxation of pass-through business income create unfairness and inefficiency. Certain income structures, like S corporation distributions, avoid taxes. The current system is challenging to administer.
Proposal:
Expand the Net Investment Income Tax (NIIT) to cover all pass-through business income of high-income taxpayers, ensuring fairness. Apply the NIIT or SECA tax to all relevant income. Effective for taxable years beginning after December 31, 2023.
Additional Comment:
The proposal also includes increasing the top marginal income tax rate and taxing capital gains at ordinary income rates for taxpayers earning over $1 million annually.
There are additional proposals to eliminate the step-up in basis for gains on inherited assets for high-income individuals.
INCREASE THE NET INVESTMENT INCOME TAX RATE AND ADDITIONAL MEDICARE TAX RATE FOR HIGH-INCOME TAXPAYERS
Current Law:
High-income individuals are subject to a 3.8% tax on Net Investment Income Tax (NIIT) as well as an additional Medicare tax. Proceeds from these taxes flow into different funds.
Reasons for Change:
The Medicare Trust Fund is at risk of depletion. The existing collection and administration in Medicare taxation lacks consistency.
Proposal:
Increase the additional Medicare tax rate by 1.2 percentage points for taxpayers earning over $400,000. Similarly, raise the NIIT rate by 1.2 percentage points for the same group. Direct NIIT proceeds to the Medicare Trust Fund. Effective for taxable years starting after December 31, 2023.
Additional Comment:
The article mentions that the proposal includes taxing capital gains at ordinary income rates for taxpayers earning over $1 million annually, which complements the NIIT and additional Medicare tax increases.
INCREASE THE TOP MARGINAL INCOME TAX RATE FOR HIGH-INCOME EARNERS
Current Law:
The top marginal income tax rate is 37%. This rate applies to taxable income over specified thresholds.
Reasons for Change:
Raising the top tax rate will increase revenue and enhance tax progressivity.
Proposal:
Raise the top marginal tax rate to 39.6% for taxable income over specified thresholds. Effective for taxable years starting after December 31, 2023.
Additional Comment:
The proposal includes increasing the top marginal income tax rate to 39.6 percent for taxable income over $452,700 for single filers and $509,300 for joint filers, as opposed to the unspecified threshold mentioned in the summary.
REFORM THE TAXATION OF CAPITAL INCOME
Current Law:
Long-term capital gains and dividends are taxed at preferential rates, benefiting high-income taxpayers disproportionately.
Reasons for Change:
Current tax treatment of capital gains exacerbates income inequality and encourages tax avoidance strategies.
Proposal:
Tax capital income for high-income earners at ordinary rates. Treat transfers of appreciated property by gift or on death as realization events. Effective for transfers occurring after December 31, 2024.
Additional Comment:
Along with the proposal to tax capital gains at ordinary income rates for taxpayers earning over $1 million annually, there's an additional focus on eliminating the step-up in basis for inherited assets for high-income individuals.
IMPOSE A MINIMUM INCOME TAX ON THE WEALTHIEST TAXPAYERS
Current Law:
Preferential treatment for unrealized gains disproportionately benefits high-wealth taxpayers.
Reasons for Change:
Unrealized gains exacerbate income inequality and encourage tax avoidance.
Proposal:
Impose a minimum tax of 25% on total income for taxpayers with wealth over $100 million. Payments can be spread over several years. Effective for taxable years starting after December 31, 2024.
Additional Comment:
The article highlights the proposal to impose a minimum 20% tax rate on corporations' book income for entities with book income over $2 billion.
There's also a mention of the proposal to eliminate the carried interest loophole, which allows certain investment managers to pay capital gains rates on income.
