The White House has hit back at criticism from Wall Street and Silicon Valley of its plans to raise capital gains taxes for high-earning Americans, saying it would affect the income of only a “sliver” of the US population which was unearned or based on rent-seeking.
US president Joe Biden is this week expected to roll out a series of tax increases on the wealthy, including a near-doubling of levies on capital gains and dividends, in order to fund a new education and child care spending package that could top $1.5tn.
A senior Biden administration official told the Financial Times that just 0.3 per cent of people filing taxes in the US would be hit by higher levies on their investments under its plan, at a time when wealth for the richest Americans has soared during the pandemic.
“There’s increasing evidence that over recent years in fact many, many of the returns at the very top are what they call above-market rates of return, rents and so on,” the senior administration official said. “Taxing the people who are doing extremely well in the economy is one way of asking somewhat more from that.”
Taxes on capital gains and dividends are currently set at 20 per cent. But under Biden’s plan, they would be treated as ordinary income at a top rate the US president wants to set at 39.6 per cent, up from 37 per cent. Combined with a surtax on investment income introduced by Barack Obama in connection with his signature healthcare reform, this would bring the US tax rate on capital gains and dividends to 43.4 per cent.
Some investors have reacted furiously to the proposal. Scott Minerd of Guggenheim Partners, the hedge fund, dubbed it “insanity” while Tim Draper, a prominent venture capitalist, said it might “kill the golden goose that is America”.
But many Democrats and Biden administration officials believe the higher taxation on investment income is long overdue and there should be little surprise that the US president is following through with a key pledge from his 2020 race against Donald Trump.
“This is consistent with what the president had said on the campaign trail, which was that we needed to fundamentally reform parts of the code that affect the very, very richest or very highest income Americans, in ways to make sure that it is fair and not rewarding wealth over work,” the Biden administration official said.
One of the biggest consequences of the change to capital gains taxation proposed by Biden is that it will eliminate the preferential tax treatment of many private equity, hedge fund and real estate investor profits — known as carried interest.
“Private equity managers and hedge fund managers who are managing other people’s investments effectively get paid in capital gains rates for their labour in ways that almost no other worker can who doesn’t have that kind of planning opportunity. And this would address that,” the official said.
The official cited data showing that among the very wealthiest Americans — about 1,400, or 0.01 per cent, of all tax filers earning more than $16m per year — tax payments were disproportionately skewed towards lower capital gains rates rather than higher ordinary income rates.
“That’s why this reform focuses really on that top sliver. And it would eliminate the kinds of tax planning and games that can occur among people who are at the very top,” the official said.