Although there have been no official changes yet, market fears over announced plans for a significant capital gains tax hike appear to have had a negative impact on the economy.
According to Bloomberg, the stock market tumbled significantly on Thursday, with the S&P 500 Index declining by 0.9%.
“If it ain’t broke, don’t fix it”
President Joe Biden is reportedly set to announce a spending plan that would nearly double the current capital gains tax rate paid by those earning $1 million or more to 39.6% from the 20% now in place.
Combined with a 3.8% surtax on investment income imposed to help fund the Affordable Care Act, the new rate would effectively be 43.4%.
U.S. Sen. Chuck Grassley (R-IA), who serves as the senior GOP member of the Senate Finance Committee, warned that the move would negatively impact economic growth.
“It’s going to cut down on investment and cause unemployment,” he complained. “If it ain’t broke, don’t fix it.”
Wealthy individuals in high-tax blue states would see an even more staggering increase, with those in New York paying a combined state and federal rate of 52.22%. The expected tax liability would be steeper still in California, where the predicted rate for wealthy residents would be 56.7%.
“Manifestly unfair risk”
Such numbers are likely to increase pressure from Democrats in favor of allowing taxpayers to deduct state and local taxes on their federal returns. That option was limited under former President Donald Trump’s 2017 tax reform plan.
U.S. Rep. Jerry Nadler (D-NY) said as much in a statement earlier this month, describing a repeal of state and local tax, or SALT, limitations as “a question of fundamental fairness.”
He went on to note that taxpayers in New York “already send $40 billion more in taxes to federal coffers than the state receives in return,” insisting that they now “face the manifestly unfair risk of being taxed twice on the same income.”
For her part, White House Press Secretary Jen Psaki said that the administration is “still finalizing what the pay-fors look like” in response to a question about the capital gains tax rate as part of the funding for the president’s proposed American Families Plan.
The Biden administration has already announced recommended tax hikes to pay for a massive infrastructure proposal, which would mean an increase in the corporate rate from 21% to 28% while levying a higher minimum rate on foreign earnings.