President Biden is set to unveil a sprawling $1.8 trillion spending plan to ramp up federal investment in education, child care and paid family leave, funded by a slew of new tax hikes on rich Americans.
The American Families Plan – which Biden will formally introduce Wednesday night during his first address to a joint session of Congress – includes $1 trillion in spending over the next decade, as well as $800 billion in tax credits for low- and middle-income Americans.
It's paid for in large part by $1.5 trillion in tax increases levied on the upper sliver of U.S. households, including nearly doubling the capital gains tax rate to 39.6% from 20% for those earning more than $1 million and restoring the top individual income tax rate to 39.6%, where it sat before Republicans' tax overhaul in 2017, for the top 1% of earners.
But Biden noticeably abandoned some tax-hike proposals that he campaigned on during the 2020 presidential election.
The White House omitted a plan to increase the estate tax, a long-standing Democratic priority that Biden pledged to pass if he was elected. As a candidate, Biden promised to raise the estate tax rate to 45% and lower the exemption to $3.5 million. But the American Families Plan left the estate tax untouched, with the exemption still at about $11.5 million for individuals, and the tax rate at 40%.
In 2020, just 1,900 estates (out of the roughly 2.8 million people who died that year) owed estate taxes, according to a recent estimate published by the Tax Policy Center. The tax raised about $14.9 billion in federal revenue in 2018, the nonpartisan group reported.
Bloomberg News reported the White House passed over the estate tax hike because aides did not want to include policy items unless they were sure they had the backing of congressional Democrats. They also determined that nearly doubling the capital gains tax was dramatic enough.
Coupled with an existing Medicare surcharge, federal tax rates for the wealthy could climb as high as 43.4% under Biden's plan – bringing the levy on returns on financial assets higher than rates on ordinary income.
"We're talking about a tax change that would affect the three-tenths of one percent, the top sliver of households," Brian Deese, Biden's top economic adviser, told reporters on Monday. "The principle here is to equalize the treatment of ordinary income and capital gain."
Taxes on long-term capital gains – generally classified as an asset that's held for more than one year – currently range from 0% to 20%, depending on a person's income. Wealthier investors are also subject to an additional 3.8% tax on long- and short-term capital gains that's used to fund ObamaCare. Short-term capital gains on assets sold within a year are typically taxed as ordinary income.
The president also dropped a plan to pare back tax preferences for so-called pass-through businesses, including repealing the 20% deduction for such entities.