Earlier this year, President Joe Biden proposed a dramatic increase to the country’s capital gains tax, from 29.2% to 48.6%. If enacted, the change would make the capital gains tax rate in the United States the second highest in the world, barely behind Ireland’s rate of 51%. 

According to the Peter G. Peterson Foundation, capital gains taxes are assessed when an asset like a stock or mutual fund is sold for a profit. Taxes are divided into short-term and long-term, and rates are typically lower than the ordinary income tax rate. Biden’s proposed plan would change that for the wealthiest individuals, substantially increasing the amount of taxes they pay.

The government currently receives about $183 billion in revenue from capital gains taxes each year, or a little less than 1% of the country’s total gross domestic product. While the goal of the Biden Administration’s plan is to increase that revenue by increasing the tax rate, Howard Gleckman of the Tax Policy Center (TPC)  argues that the change could end up having the opposite effect.

“The more Congress raises taxes on capital gains, the more likely taxable investors will defer tax by hanging on to their investment profits,” Gleckman wrote. “TPC estimates the revenue-maximizing rate on capital gains is about 28 percent, not much higher than today’s rate.”

Another big change in the Biden plan is to change the process for assessing a capital asset when it is bequeathed to someone upon the original owner’s death. The Biden plan calls for reassessing the asset’s value at the time it changes hands and adjusting it to reflect current market value. 

For example, an asset that was purchased at $100,000, bequeathed at $180,000, and sold at $200,000 is currently taxed based on a $20,000 profit. The proposed regulations would tax all $100,000 profit dating back to the original purchase. The Congressional Budget Office estimates that this change could increase tax revenue by $105 billion over 10 years.

The capital gains tax changes are included in the American Families Plan, which the Biden Administration introduced in late April and has been promoting all summer ahead of this fall’s congressional session.


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Image Credit: Photo by Gage Skidmore Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0) on Flickr