High-earning taxpayers are set to have additional tax burdens placed upon them.
As part of President Joe Biden’s American Families Plan (AFP), the White House proposed two major tax increases on accumulated wealth, adding up to a new 61% consolidated tax rate on wealth.
First, the AFP would tax unrealized capital gains at death for unrealized capital gains worth over USD $1 million. Currently, long-term capital gains of high earners are subject to a 20% tax rate and the 3.8% net investment income tax (NIIT) when the gains are realized (sold).
Second, the Biden Administration also wants to tax the capital gains of millionaires at ordinary income tax rates, which would be levied at his proposed top marginal rate of 39.6%. Added to the NIIT, it would mean a combined top tax rate on capital gains of 43.4%, compared to 23.8% today.
In addition to taxing unrealized capital gains at death at ordinary income tax rates, large estates would also be subject to the current estate tax of 40% above an exemption of USD $11.7 million per person.
Take for example an estate with an asset worth USD $100 million (only subject to capital gains for simplicity). The Biden Administration’s proposed changes would be fundamental.
At death there would be an immediate capital gains tax liability of $42.9 million. Upon payment of this capital gains tax, the value of the $100 million asset would fall to $57 million for the purposes of the estate tax. After subtracting the $11.7 million exemption, the 40% estate tax rate would be levied on the remaining $45.3 million in assets to produce an estate tax bill of about $18.1 million. The result would be $39 million left for heirs.
In America, the idea of taxing unrealized gains at death and levying the estate tax at the same time has never been proposed.
US estate tax law has traditionally allowed for a “step-up” at death; which allows any taxable gains on assets to be wiped away at death. The rule allows the wealthy and their heirs to completely avoid such taxes.
Combining both taxes at the same time, as Biden has proposed, results in a total tax liability of $61.1 million on the original $100 million asset, for an effective tax rate of 61%. The tax rate under Biden’s proposal is nearly twice the effective tax rate that the same asset would face today under existing tax rules.
Most economists agree that both the estate tax and capital gains taxes already amount to a second or third layer of tax on the same income. In the case of corporate stocks, capital gains (and dividends) are second layers of tax on corporate profits that were already taxed by the corporate income tax. Estate taxes are levied on assets that were purchased with after-tax income and on assets that may already have been taxed, as might be the case with stocks or corporate bonds.
Whether these changes ultimately become law, America’s wealthy (and their advisers) need to start considering investment migration options that allow for a logical and consistent exit strategy to commence, which includes renunciation of US citizenship. The ‘progressive’ agenda is taking hold in America’s halls of power; and the wealth beware.