Biden's Capital Gains Tax Plan Fixes Nothing
Small-business owners may still pay a higher marginal tax rate than wealthy people with investments -- and possibly a higher effective rate too.
Wall Street might not like Joe Biden’s tax plan.
Photographer: Spencer Platt/Getty Images
Democratic Presidential challenger Joe Biden’s proposed tax plan includes raising long-term capital gains tax rates and taxes on dividends to 39.6% for those making more than $1 million a year. That would be an increase from the current 23.8%, marking the biggest hike in capital gains taxes in history. Given all that is going in with elections, the topic is not getting much attention, but it has the potential to cause a great deal of economic distortions.
The capital gains tax rate has historically been lower than taxes on ordinary income, which is the taxes paid on salary or business income. Wealthy people pay a disproportionate amount of these taxes, because they are more likely to hold financial assets such as stocks, bonds and real estate. This is why it is not unusual for the wealthy to pay lower effective tax rates than lower income people. Warren Buffett famously said in 2012 that he paid a lower effective tax rate than his secretary, an anecdote that found its way into one of President Barack Obama’s State of the Union speeches.