Introduction
With just days left until his 100th day in office, President Joseph Biden is presenting a third economic package worth over $1 trillion entitled the American Families Plan. This $1.8 trillion package intends to increase funding for childcare and education. However, to help pay for this package, the president is looking to America’s wealthiest.
Why investors are angry
The proposal includes a dramatic increase in the capital gains tax rate for those making $1 million per year or more. Simply put, the capital gains tax is a tax on profit made by the sale of non-inventory assets such as stocks or bonds. Currently, the capital gains tax rate is 20% for those who make the aforementioned income. However, this plan would increase that number to 39.6%, which will become the new top income tax rate if this plan comes to pass. That is not all, since the surtax on investment income introduced by former President Barack Obama would actually make the total tax rate 43.4 %.
In just one bill, the capital gains tax rate would more than double for the wealthiest of the United States. This doesn’t even account for the capital gains taxes issued by individual states. For example, in California, the combined state and federal rate would be 56.7%.
Possible long-term effects of the bill
Needless to say, many investors and venture capitalists are infuriated by this plan, since it would reduce the value and drive to allocate money towards long-term investments. Furthermore, if fewer people commit to investments because of this much larger tax, the tax revenue will be reduced over time. This would essentially defeat the purpose of the tax increase in the first place. Also, as if building a business from the ground up wasn’t difficult enough, it will become much more difficult for entrepreneurs to acquire investments to help get their business started. The announcement of this plan resulted in stocks sliding more than they had in a month, which reflected the impact that this plan would likely have on the stock market as a whole.
Sources
- https://www.bloomberg.com/news/articles/2021-04-22/biden-to-propose-capital-gains-tax-as-high-as-43-4-for-wealthy
- “Biden tax rise fans investor fury,” published in the Financial Times, reporting by Eric Platt, Aziza Kasumov, Michael Mackenzie, Mark Vandevelde in New York, Miles Kruppa in San Francisco, and James Politi in Washington
