The U.S. Department of Treasury’s proposed budget has received a significant warning from a prominent policy group regarding the potential increase in taxes for certain Americans. The budget suggests a record high 44.6 percent capital gains tax rate, which would be the highest rate since the tax was created in the 1920s. President Joe Biden’s proposed budget states that the disparity between taxes on capital gains and labor income encourages wasteful efforts to convert labor income into capital income as a tax avoidance strategy.
The Americans for Tax Reform, a conservative-leaning group advocating for lower taxes, has criticized the proposed plan, stating that it could have disastrous effects on the struggling U.S. economy, already grappling with high inflation and interest rates. John Kartch, representing the group, warned that President Biden’s proposal would result in combined federal-state capital gains tax rates exceeding 50 percent in several states, including California, New Jersey, Oregon, New York, and Minnesota. In fact, California would have a staggering 59 percent capital gains tax rate if the proposed Biden tax plan is implemented.
Kartch also highlighted the issue of capital gains not being indexed to inflation, meaning that Americans would be taxed on gains that are not real and essentially paying taxes on inflation. He argued that this would be especially painful given the high inflation caused by President Biden’s policies.
President Biden himself has suggested that significant portions of the Trump-era Tax Cuts and Jobs Act would expire next year if he wins reelection. This expiration would lead to larger tax bills for many Americans. The 2017 tax law had reduced the top individual income tax bracket from 39.6 percent to 37 percent, but these changes are scheduled to end in 2025.
Experts predict that if the tax cuts expire in full, most Americans will experience an increase in their personal tax bills, along with worsened incentives for working and investing. The Tax Foundation estimates that a person making $30,000 annually would see their taxes rise by an average of $253.75 in 2026, while a married couple with two children earning $165,000 would have to pay approximately $2,450.50 more.
While the looming expirations may not be addressed immediately by lawmakers, it is suggested that they should consider the trade-offs of each change made by the 2017 tax law and create a tax code that promotes growth and opportunity without worsening the U.S. debt, according to Erica York, senior economist and research director at the Tax Foundation.
White House officials have responded by stating that if President Biden is reelected, the tax cuts would be extended for individuals earning less than $400,000 per year. They argue that the Trump-backed tax cuts would raise taxes for middle-class Americans after 2025.
In response to the issue, Republicans introduced a measure to make the capital gains and individual provisions of the Tax Cuts and Jobs Act permanent after gaining control of the House last year. The aim was to provide relief and certainty to hardworking families and Main Street businesses and prevent the expiration of these tax cuts.
The proposed tax increase in President Biden’s budget has sparked significant debate and concern among different groups. While some argue that it could have negative consequences for the economy and middle-class Americans, others believe that it is necessary to address wealth disparities and promote economic growth. As discussions continue, it remains to be seen how this proposed tax increase will be received and whether any adjustments will be made to mitigate its potential impact.
