President Biden has recently put forth a budget proposal for 2025 that includes a significant increase in the top capital gains tax rate, marking the highest level in over a century. The proposal outlines a plan to raise the top marginal rate on long-term capital gains and qualified dividends to 44.6%, a substantial jump from the current rate.
Under this proposal, the combined federal-state capital gains tax would surpass 50% in several states across the country. States like California, New Jersey, Oregon, Minnesota, and New York would face rates ranging from 53.4% to 59%, significantly impacting taxpayers in these regions.
One of the key concerns raised by this proposal is the lack of indexing capital gains to inflation, leading to individuals being taxed on gains that may not accurately reflect real value due to inflation. This can particularly affect individuals who have invested in businesses over several decades and are now looking to sell, facing a substantial tax burden on gains that are partially inflated.
The capital gains tax is often viewed as a form of double taxation, especially when considering that it is imposed on top of the existing federal corporate income tax rate of 21%. President Biden has also suggested an increase in the corporate income tax rate to 28%, further compounding the tax burden on businesses and investors.
Comparatively, the proposed top capital gains tax rate in the United States would be more than double that of China, which currently stands at 20%. This raises questions about the competitiveness of the U.S. tax system in relation to other global economies, particularly with such a significant disparity in tax rates.
The history of the capital gains tax dates back to 1922 when it was introduced at a rate of 12.5%. Biden’s proposed rate for 2025 would place the United States in uncharted territory, significantly higher than historical levels and global counterparts.
Furthermore, the proposed tax hike could also impact families during generational wealth transfers, as Biden has suggested implementing a second Death Tax that eliminates stepped-up basis, resulting in a mandatory capital gains tax event upon the transfer of assets to heirs.
As the debate around tax policy continues, the implications of such significant tax increases on capital gains could have far-reaching effects on businesses, investors, and families across the country.
