President Joe Biden’s proposal to increase the top capital gains tax rate could be the highest such tax rate in over a century.
In his 2025 budget proposal, Biden outlined plans to elevate the top marginal rate on long-term capital gains and qualified dividends to 44.6%. This rate, if enacted, would surpass any seen in over a century, according to Americans for Tax Reform (ATR).
Moreover, the combined federal-state rate could exceed 50% in several states when factoring in state capital gains taxes. For instance, California residents would potentially face a 59% rate, while those in New Jersey, Oregon, Minnesota, and New York could confront rates ranging from 53.4% to 55.3%, according to ATR.
Critics of the proposal argue that capital gains taxes, particularly when not indexed to inflation, impose a form of double taxation and disproportionately affect certain demographics. Small business owners, for example, may find themselves grappling with inflated tax liabilities on gains that are partly attributable to inflation rather than real profit.
Furthermore, comparisons with other nations highlight the potential ramifications of such a steep increase. China, for instance, maintains a capital gains tax rate of 20%, significantly lower than Biden’s proposed rate. The prospect of imposing higher taxes than a major economic competitor raises concerns about the impact on investment and economic competitiveness.
The history of the capital gains tax underscores the magnitude of Biden’s proposal. Initially introduced in 1922 at a rate of 12.5%, the tax has evolved over the decades but has never approached the proposed levels.
Additionally, Biden’s plan includes measures to address tax implications upon inheritance, potentially adding further complexity to the tax code. The proposal to eliminate a stepped-up basis upon the transfer of assets upon death could result in a mandatory capital gains tax event, affecting families’ financial planning and estate management.
“When someone dies, and the asset transfers to an heir, that transfer itself will be a taxable event, and the estate is required to pay taxes on the gains as if they sold the asset,” said Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center, CNBC reported.
The budget proposal, which calls for approximately $5 trillion in tax increases over the next decade, has drawn mixed reactions from lawmakers and experts alike. While some argue that such measures are necessary to fund various social programs and infrastructure projects, others express concerns about the potential adverse effects on economic growth and investment.
