President Joe Biden will propose nearly doubling the capital gains tax rate for the wealthy to 39.6 percent, which, combined with the existing surtax on investment income, means the federal tax rate for investors could be as high as 43.4 percent, according to a person familiar with the matter.
The plan, which has not been made public, would raise the capital gains tax rate for those earning $1 million and above to 39.6 percent from the current 20 percent, said the people, who asked not to be named.
The tax rate on investment income that finances Obamacare would remain at 3.8 percent, which would make the tax rate on returns on financial assets higher than the top rate on payroll income, they said.
The proposal could overturn a long-standing provision in the tax code that taxes investment returns less than labor. Biden, who campaigned on balancing capital gains and income tax rates for the wealthy, said it is unfair that many of the wealthy pay lower tax rates than middle-class workers.
Biden is expected to unveil the proposal next week as part of a tax increase to fund social spending in the upcoming Families USA program.
For those with $1 million in income in high-tax states, the capital gains tax rate could exceed 50 percent.
For New Yorkers, the combined state and federal capital gains rate could be as high as 52.22%. For Californians, the tax rate could be as high as 56.7 percent.
Democrats have said that the current capital gains tax rate largely helps high-income earners who earn income through investments rather than wages, resulting in lower tax rates for the wealthy than for those they employ.
Republicans argue that the current capital gains tax rate encourages savings and promotes future economic growth.
Following the news, the three major U.S. stock indexes took a short dive, with the Dow down 160 points, the Nasdaq turning lower, and the S&P 500 now down 0.3%.
Star technology stocks quickly sank, with Tesla down nearly 2%, Apple down 0.28%, Amazon down 0.79% and Google down 0.48%.
The 10-year U.S. bond yield fell to 1.556% after Biden announced a capital gains tax hike.
Creset Capital Management (Creset Capital Management) founding partner and chief investment officer Jack Ablin said: “Biden’s proposal effectively doubles the capital gains tax rate for income earners earning $1 million.”
“That’s a pretty big cost increase for long-term investors. Investors are expected to sell off this year if they think the proposal is likely to become law next year.”
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