As part of his $1.8 trillion American Families Plan, Biden has called for nearly doubling the top capital gains tax rate from 20% to 39.6% and eliminating a tax break for wealthy heirs known as the "step-up" in basis.
Combining the liability from those proposals, along with an existing Medicare surcharge, the total effective marginal rates could climb as high as 61%, according to the Tax Foundation, a nonpartisan organization based in Washington. That's nearly double the effective tax rate paid by rich Americans under existing tax law.
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"Taxing unrealized gains at death while still levying the estate tax further compounds the total tax burden on saving and investment, which may be the highest tax burden on capital gains seen in nearly a century," the study, authored by Scott Hodge and Garrett Watson, said.
Under current law, when heirs inherit an asset that has appreciated in value, they get a "step-up" in basis, meaning they receive the holding at its current market value. Beneficiaries can sell those assets and pay capital gains based only on the time they receive the asset and the time they sold it, allowing them to minimize the tax penalty.
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But Biden wants to close that loophole – a proposal that could have significant consequences for some of the wealthiest people in the country.
Congress estimates that stepping up the basis of inherited assets costs the government about $43 billion a year. Eliminating the practice – coupled with raising the top statutory rate on capital gains from 20% to 39.6% – would generate an estimated $113 billion in new revenue over the next decade, according to recent findings from the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania's Wharton School.
The money would go toward funding a massive expansion of the social safety net, including establishing universal pre-kindergarten, free community college, paid family leave and tax credits for low- and middle-income households.
"While the headline tax rate increase to 39.6% will catch eyes, the magnitude of the tax increases proposed on wealthy individuals is really in the details," said Brad Sprong, partner and private enterprise tax leader at KPMG. Sprong said the elimination of the "step-up" in basis at death would have a "substantial impact" on individuals, resulting in a tax rate of nearly 65% for the richest Americans.
The 10-year initiative faces a steep hill to passage, even though Democrats control both chambers of Congress. Many moderate members of the president's party are likely to push back against his proposal to equalize the tax on capital gains and normal income, as well as his plan to eliminate the step-up. Republicans have already panned the proposal, with Senate Minority Leader Mitch McConnell, R-Ky., predicting that no GOP senator would support the measure, known as the American Families Plan.
What's more, many critics suggest that rich Americans would find other means of dodging the tax. Penn Wharton economists suggested that tax avoidance, most of it legal, would cut about $900 billion of the estimated $1 trillion that a capital gains tax increase could generate for the federal government.