clearn.png
Thursday October 21st, 2021 1:15AM

EXPLAINER: Capital gains tax hike targets wealthy investors

By The Associated Press
Related Articles
  Contact Editor

NEW YORK (AP) — After massive U.S. government spending helped send the stock market back to record heights, with even more potentially on the way, the bill may be coming due for the nation's wealthiest investors.

President Joe Biden is proposing to nearly double the tax rate the highest-earning Americans pay on profits made from stocks and other investments. It would force millionaires to pay similar tax rates on their investment gains as upper-middle class households pay on their salaries, after years of enjoying lower rates.

It's part of Biden’s efforts to tax wealthy people and corporations to pay for infrastructure investments and programs aimed at helping the broader economy. The most recent proposals, which Biden will detail in a speech before Congress later on Wednesday, focus on lower-income families and children. They include universal preschool for 3 year olds, two years of free community college and the extension of tax cuts for lower- and middle-income families.

Even though the possibility of higher capital-gains tax rates has been telegraphed for a long time, reports of its pending unveiling shook up the stock market, with the S&P 500 falling to a nearly 1% loss on Thursday. Stocks have since set more records, but the kneejerk reaction shows how much investors care about potential changes in tax rates.

WHAT IS THE CAPITAL GAINS TAX?

The capital gains tax must be paid on profits made from an investment, such as a stock or a Bitcoin. But it only takes effect after a sale locks in the gain. So if you bought a share of Tesla at $200 early last year and are sitting on a profit of more than $500, you won’t owe anything unless you sell.

If you do sell, and you are one of the highest-earning Americans, current law says you’d pay a 23.8% tax on a $500 profit, or $119. That includes a 20% tax on investments held for more than a year, known as a “long-term capital gains" tax. It also includes an extra 3.8% tax on investments for high earners that’s been around since 2013 to help pay for the Affordable Care Act.

WHAT IS BIDEN LOOKING TO CHANGE?

Biden wants to raise the tax rate on long-term capital gains for Americans who make more than $1 million in a year. Their rate would rise to 39.6% from 20%. With the additional 3.8% tax, the highest-earning Americans could be paying a total tax rate of 43.4% on profits from long-term investments.

That would be the highest top rate since the 1920s, according to the Tax Foundation, and the proposal could make the rate on investment gains similar to the rate on income made from working.

The top tax rate that workers pay on salaries and wages now is 37%. Biden wants to move the top tax rate on work income up to 39.6%, which is where it was before the 2017 tax cuts.

One reason tax rates have been lower on long-term capital gains than for regular work is that supporters say it encourages long-term investment and helps the economy.

ARE THERE OTHER RELATED CHANGES?

Biden is asking Congress to wipe out a preferential tax treatment for private-equity executives and other money managers earning millions of dollars annually, something referred to as “carried interest.”

For years they've been paying only 23.8% in federal tax because much of their compensation was treated as a long-term capital gain. The industry says that encourages private-equity firms to take risks as entrepreneurs and to continue investing in companies.

Because of it, many wealthy private-equity managers pay a lower rate than what households with married people filing their taxes jointly were paying on income above $171,050.

Besides targeting “carried interest,” Biden is also asking Congres for more funding for the IRS so it can be more aggressive in auditing wealthy Americans, among other proposals.

HOW BIG A DEAL ARE ALL THE CHANGES?

Altogether, the White House says the tax law changes focusing on higher-earning Americans would raise about $1.5 trillion across the decade. That would be in addition to the more than $2 trillion that the White House is looking to raise over the next 15 years from changes to corporate taxes.

Besides helping to pay for the programs Biden is proposing, the White House says its proposals for capital gains rates and other changes will eliminate tax laws “that reward wealth over work” and hopefully “rein in the ways that the tax code widens racial disparities in income and wealth.”

Republicans in the Senate — where Biden’s Democratic party holds the slimmest of majorities — have already offered resistance to Biden’s proposals for big increases in spending and taxes for the wealthiest households.

BUT THE CHANGE IN THE CAPITAL GAINS TAX WOULD HIT VERY, VERY FEW PEOPLE?

Only the top 0.3% of taxpayers, or about 500,000 households across the country, would be affected by the proposed rise in long-term capital gains rates, according to Brian Deese, director of the White House National Economic Council.

THEN WHY DOES THE MARKET CARE SO MUCH?

The wealthiest households are very, very rich, and own a lot of stock.

The wealthiest U.S. households are collectively sitting on $1 trillion to $1.5 trillion in gains on stocks that they will have to pay taxes on whenever they sell, according to a Goldman Sachs analysis of data from the Federal Reserve. That's roughly 3% of the entire U.S. stock market's total value.

The concerns are that those rich investors will dump their stocks before the rate is increased, and that would-be investors would be discouraged from buying stocks because of the higher rate.

ARE THOSE CONCERNS VALID?

The last time Washington raised capital-gains tax rates in 2013, the wealthiest households sold 1% of their stock holdings in the three months before the new rate went into effect, Goldman Sachs strategists say.

However, the selling was short-lived and the S&P 500 rose 30% for the year.

Stocks tend to go up over the long term. So, a sale today would mean an investor would be losing out on all the gains that may be coming in future years.

Also, many on Wall Street are expecting Democrats and Republicans to try for a compromise rate that’s lower than 43.4%.

___

Associated Press Writer Josh Boak contributed to this report.

  • Associated Categories: Associated Press (AP), AP National News, AP Online National News, Top General short headlines, AP Business, AP Business - Economy, AP Business - Personal Finance
© Copyright 2021 AccessWDUN.com
All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without permission.
Explainer: Capital gains tax hike targets wealthy investors
President Joe Biden is proposing to nearly double the tax rate that the highest-earning Americans pay on profits made from stocks and other investments
11:13AM ( 5 minutes ago )
Biden to pitch sweeping 'family plan' in speech to Congress
President Joe Biden will use his first joint address to Congress to pitch a $1.8 trillion investment in children, families and education that would transform the role government plays in American life
11:04AM ( 13 minutes ago )
Prosecutor says man killed by deputies hit them with car
A North Carolina prosecutor says that a Black man killed by deputies hit law enforcement officers with his car before they opened fire
11:01AM ( 16 minutes ago )
Associated Press (AP)
Boeing posts 1Q loss, takes a hit on Air Force One work
Boeing is posting another loss as the pandemic continues to undercut demand for new planes and the company deals with more problems around its 737 Max jetliner
10:25AM ( 53 minutes ago )
The Latest: EU to hold hearing in case against AstraZeneca
The European Union’s executive branch says the first hearing in its legal case against coronavirus vaccine-maker AstraZeneca will take place in a Brussels court on May 26
10:24AM ( 54 minutes ago )
Wall Street is off to a mixed start ahead of Biden speech
Stocks are off to a mixed start on Wall Street as investors take in a big wave of earnings reports from major U.S. companies
9:46AM ( 1 hour ago )
AP Business
China cuts steel import tariffs to push industry to improve
China has suspended some import duties on steel as part of a multiyear campaign to force the state-dominated Chinese industry to become more energy efficient and profitable
8:09AM ( 3 hours ago )
EU lawmakers approve post-Brexit trade treaty
European lawmakers have approved the final ratification of the post-Brexit trade deal between the European Union and the United Kingdom, nearly five years after Britain decided to leave the bloc
5:16AM ( 6 hours ago )
Global shares mostly higher before Fed meeting, Biden speech
Global shares are mostly moderately higher in listless trading as investors watch for news out of a Federal Reserve meeting
5:00AM ( 6 hours ago )
AP Business - Economy
A closer look at Biden's $1.8T for families and education
The Biden administration wants to make a $1.8 trillion down payment on the future of children, families and higher education, saying it would produce lasting benefits for the economy
5:38AM ( 5 hours ago )
Facing $11B tax bill, Samsung heirs donate massive art trove
Samsung’s founding family says it will donate tens of thousands of rare artworks, including Picassos and Dalis, and give hundreds of millions of dollars to medical research to help them pay a massive inheritance tax following last year’s death of chairman Lee Kun-Hee
3:33AM ( 7 hours ago )
Facing $11B tax bill, Samsung heirs donate mass art trove
Samsung’s founding family says it will donate tens of thousands of rare artworks, including Picassos and Dalis, and give hundreds of millions of dollars to medical research to help them pay a massive inheritance tax following last year’s death of chairman Lee Kun-Hee
12:53AM ( 10 hours ago )
AP Business - Personal Finance
Biden to pitch sweeping 'family plan' in speech to Congress
President Joe Biden will use his first joint address to Congress to pitch a $1.8 trillion investment in children, families and education that would transform the role government plays in American life
11:04AM ( 13 minutes ago )
Prosecutor says man killed by deputies hit them with car
A North Carolina prosecutor says that a Black man killed by deputies hit law enforcement officers with his car before they opened fire
11:01AM ( 16 minutes ago )
NFL draft could see record run of quarterbacks taken
As soon as the San Francisco 49ers traded three first round picks to move up to No. 3 overall, it became clear that quarterbacks would come off the board at a record pace
10:54AM ( 23 minutes ago )
Celebs like Dolly and Bruce raid closets for charity auction
Christine Baranski wants your help cleaning out her closet
10:47AM ( 30 minutes ago )
Former members of Italian Red Brigades arrested in France
The French presidency says that seven Italians convicted of domestic terrorism crimes have been arrested at their homes in France
10:37AM ( 41 minutes ago )