The super-rich keep getting super-richer. The Biden administration has therefore suggested taxing capital gains at the same rate as ordinary income for Americans earning more than $1m in a year.
That demographic is a mere sliver of taxpayers — less than half of one per cent. But the group is as skilled at complaining as making money. On cue, lobbyists are lamenting that investment and economic growth would suffer if the super-rich had to pay taxes in the way doctors and lawyers do.
Unhelpfully for the lobbyists, the S&P 500 is up from its March lows last year. Real estate, art and cryptocurrencies are also on a tear. President Joe Biden needs to pay for infrastructure and welfare spending — and arrest 40 years of widening income and wealth inequality. Might it be time to test the dogma that returns on capital should be advantaged over returns on labour?
Between 1989 and 2016, US household wealth nearly tripled to $87tn according to the US Federal Reserve. At the same time, the top tenth of households owned 77 per cent of that wealth, up ten percentage points from almost three decades earlier.
Tax policy helped widen that gap. Long-term capital gains are taxed at a maximum of 24 per cent. Top rate federal income tax rate is 37 per cent and could rise to 43 per cent. Capital gains come with other tax advantages. They are only taxed upon realisation, so can compound tax-free, for example.
America’s tax system is already progressive. According to IRS data, tax filers earning more than $1m are about 0.35 per cent of the total. In 2018, their taxable income was 18 per cent of the total in America while they paid nearly 28 per cent of total taxes.
The Biden proposal almost certainly will be watered down if it is enacted at all. But it has stark consequences for parts of Corporate America. Carried interest earned by private equity managers would no longer be subsidised. Entrepreneurs thinking about exits would consider doing so early.
The reform would make risk capital more expensive and tweak the skewed incentives of wealthy investors. But the basic cost of risk capital has never been lower. If there is any time for modest redistribution of private investment capital to the public sphere, it is now.
The Lex team is interested in hearing more from readers. Please tell us what you think of the Biden tax proposals in the comments section below.
Letter in response to this column:
The US tax system is flat, not progressive / From Sim Gurewitz, El Cerrito, CA, US