WASHINGTON (Reuters) – President Joe Biden will roll out a plan to raise taxes on the wealthiest Americans, including the largest-ever increase in levies on investment gains, to fund about $1 trillion in childcare, universal pre-kindergarten education and paid leave for workers, sources familiar with the proposal said.
The plan is part of the White House’s push for a sweeping overhaul of the U.S. tax system to make rich people and big companies pay more and help foot the bill for Biden’s ambitious economic agenda. The proposal calls for increasing the top marginal income tax rate to 39.6% from 37%, the sources said this week. It would also nearly double taxes on capital gains to 39.6% for people earning more than $1 million.
That would be the highest tax rate on investment gains, which are mostly paid by the wealthiest Americans, since the 1920s. The rate has not exceeded 33.8% in the post-World War Two era.
News of the proposal – which was a staple of Biden’s presidential campaign platform – triggered sharp declines on Wall Street, with the benchmark S&P 500 index down 1% in early afternoon, its steepest drop in more than a month.
Any such hike would need to go through Congress, where Biden’s Democratic Party holds narrow majorities and is unlikely to win support from Republicans. It is also unclear if it would have the unanimous backing of congressional Democrats, which would be essential in the Senate where each party holds 50 seats.
“If it had a chance of passing, we’d be down 2,000 points,” said Thomas Hayes, chairman and managing member at hedge fund Great Hill Capital LLC, referring to stock market indexes.
Sources said details would be released next week before Biden’s address to Congress on Wednesday. Details of the plan may change in coming days. White House officials are debating other possible tax increases that could ultimately be included such as capping deductions for wealthy taxpayers or increasing the estate tax, sources told Reuters.
Biden has promised not to raise taxes on households earning less than $400,000.
Tax details related to the plan, which has been in the works for months, were first reported by the New York Times on Thursday morning.
White House press secretary Jen Psaki said the president would discuss his “American Families Plan” during his speech to Congress but declined to comment on any details.
She said the administration had not yet finalized funding plans but stressed Biden’s determination to make the wealthy and companies pay for new programs.
“His view is that that should be on the backs … of the wealthiest Americans who can afford it and corporations and businesses who can afford it,” Psaki said.
She said Biden and his economic team did not believe the measures would have a negative impact on investment in the United States.
Yields on Treasuries, which move in the opposite direction to their price, fell to the day’s low.
Biden’s new plan, likely to generate about $1 trillion, comes after a $2.3 trillion jobs and infrastructure proposal that has already run into stiff opposition from Republicans. They generally support funding infrastructure projects but oppose Biden’s inclusion of priorities like expanding eldercare and asking corporate America to pay the tab.
Tax hikes on the wealthy could harden Republicans’ resistance against Biden’s latest “human” infrastructure plan, forcing Democrats to consider pushing it – or least some of the measures – through Congress using a party-line budget vote known as reconciliation.
Senator Joe Manchin, a moderate Democrat from West Virginia who wields outsize power due to the party’s slim majority, said recently said he was wary of expanding the use of reconciliation.
Biden’s proposal should be viewed as an aggressive negotiating tactic, said Steve Chiavarone, a portfolio manager and equity strategist at Federated Hermes (NYSE:FHI).
“You should expect that you will get at least initially the biggest, baddest, most progressive policy proposals with the understanding that they won’t get everything they want but define the scope of the negotiation. Maybe Biden doesn’t get 39%, he will get 29%” tax rate, he said.
Wealthy Americans could face an overall federal capital gains tax rate of 43.4% including the 3.8% net investment tax on individuals with income of $200,000 or more ($250,000 married filing jointly). The latter helps fund the Affordable Care Act, popularly known as Obamacare.
Currently, those earning more than $200,000 pay a capital gains rate of about 23.8% including the Obamacare net investment tax instituted as part of that law. For tax year 2021, the top marginal tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 and $628,300 for married couples filing jointly.
Erica York, an economist at the Tax Foundation, said the proposal would put U.S. capital gains taxes at the top of the global charts. Average capital gains taxes in Europe are around 19.3%, and the highest rate there is in Denmark, which collects 42%. France and Finland charge 34%.
For residents of some states and cities that assess their own capital gains levy, Biden’s plan would push the total capital gains rate to more than 50%, York said. The rate would rise to 56.7% in California, 68.2% in New York City and 57.3% in Portland, Oregon, York said.
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