Wealthy Americans could pay one of the highest taxes on capital gains and dividends in the world if President Biden's sweeping tax and spending plan becomes law.
Biden has proposed raising the capital gains tax rate to 39.6% from 20% for millionaires; coupled with an existing Medicare surcharge, federal tax rates for the wealthy could climb as high as 43.4% – pushing the levy on returns to one of the highest in the developed world, according to a new analysis published by the Tax Foundation.
Ireland – with a 51% tax on dividends – would be the only developed nation to impose a higher tax on investment income. On average, nations in the 38-member Organization for Economic Cooperation and Development levy a marginal tax rate of 24.4% on dividend income.
Unlike the U.S., many OECD nations differentiate how they tax dividends and capital gains.
As far as capital gains tax rates, the U.S. would have the highest capital gains tax rate among OECD nations under Biden's proposal. Currently, Denmark has the highest rate of 42%, followed by Chile at 40% and Finland and France each at 34%.
Roughly one-fourth of all OECD countries do not impose a capital gains tax on the sale of long-held shares, including Belgium, the Czech Republic, South Korea, Luxembourg, New Zealand, Slovakia, Slovenia, Switzerland and Turkey.
The average capital gains tax rate among OECD members is about 19.1%, according to Tax Foundation data.
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% in the U.S., 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 top long-term capital-gains tax rate is currently paid by single taxpayers earning more than $445,850 this year (and $501,600 for married couples filing a joint tax return).
Capital gains are taxed favorably when compared to wage and salary income; under existing law, the richest Americans pay a top tax rate of 37% on ordinary income, while the top tax rate on capital gains is 23.8%.
Biden campaigned on equalizing the capital gains and income tax rates for rich Americans.
But a recent analysis by the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania's Wharton School, suggests that rich Americans would employ techniques to avoid the rate increase. 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 over the next decade, the researchers said.
"Even with stepped-up basis eliminated, several avenues for tax avoidance remain," the researchers wrote.
For instance, they said, taxpayers would likely realize more gains in years when taxable incomes fall below the threshold. They also suggested that an increased share of business incomes would be organized via pass-through interests instead of C-corporations in order to avoid the second layer of shareholder tax.
"A large body of empirical research shows that when taxes on capital gains increase, realizations of capital gains fall," the researchers wrote. "Compared with other forms of income taxed under the individual income tax, capital gains are relatively responsive, or elastic, with respect to tax rates."