WASHINGTON — President Joe Biden will propose almost doubling the capital gains tax rate for wealthy individuals to 39.6%, which, coupled with an existing surtax on investment income, means that federal tax rates for investors could be as high as 43.4%, according to people familiar with the proposal.
The plan would boost the capital gains rate to 39.6% for those earning $1 million or more, an increase from the current base rate of 20%, the people said on the condition of anonymity because the plan is not yet public. A 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than the top rate on wage and salary income, they said.
Stocks slid on news about the plan, with the S&P 500 Index down as much as 0.6% after climbing 0.2% earlier. The Nasdaq Composite fell 0.4% as of 1:15 p.m. after rising as much as 0.5%. Ten-year Treasury yields erased gains.
The proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labor. Biden campaigned on equalizing the capital gains and income tax rates for wealthy individuals, saying it’s unfair that many of them pay lower rates than middle-class workers.
The White House and Treasury Department didn’t immediately respond to requests for comment. Biden is expected to release the proposal next week as part of the tax increases to fund social spending in the forthcoming “American Families Plan.”
For $1 million earners in high-tax states, rates on capital gains could be above 50%. For New Yorkers, the combined state and federal capital gains rate could be as high as 52.22%. For Californians, it could be 56.7%.
Democrats have said current capital gains rates largely help top earners who get their income through investments rather than in the form of wages, resulting in lower tax rates for wealthy people than those they employ. Republicans argue that current capital gains rates encourage saving and promote future economic growth.