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The tax hike for the rich came closer to reality on Wednesday morning, after Senate Democrats adopted a party budget plan of $ 3.5 trillion.
The plan would raise taxes for wealthy Americans and businesses and strengthen law enforcement to fund additional spending on education, paid vacation, child care, health care and climate initiatives, according to the plan. a frame released on Monday.
This overview offers few details on specific tax policy relating to the wealthy, saying only that it seeks “tax fairness for high income earners”.
But wealthier Americans are likely to face higher taxes on their ordinary income, capital gains from investments and valued assets bequeathed to heirs, tax experts say.
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The plan would also “ban” new taxes from families earning less than $ 400,000 a year, small businesses and family farms.
At the same time, the spending plan – which paves the way for formal legislation Democrats can pass without a Republican vote – may also give tax relief to some wealthy people in high-tax states. He suggests Democrats will offer “relief” from the current $ 10,000 cap on state and local tax deductions.
Of course, appeasing all Democrats, who have very slim margins in the Senate and House, can prove difficult on tax policy and could complicate their agenda.
âAt this point, we are dealing with monopoly money,â said Bill Hoagland, senior vice president of the Bipartisan Policy Center. “It’s when we actually start putting rubber on the road that it will get a lot more difficult.”
Taxpayers who earn more than $ 500,000 paid about 70% of the total personal income taxes collected this year, Hoagland said, citing data on tax returns.
According to experts, raising the top marginal tax rate to 39.6%, from the current 37%, is the most likely way Democrats intend to raise taxes for the rich.
âI think Democrats would say, ‘This is where we were before the [2017 Tax Cuts and Jobs Act] which we did not vote for. It’s not too much to ask, âsaid Ryan Abraham, director of Ernst & Young and a member of the firm’s Washington board.
Democrats would essentially speed up current policy – the top rate on ordinary income is already set to drop to 39.6% after 2025, according to the Tax Cuts and Jobs Act.
As a result, the average tax rate paid by those earning $ 500,000 to $ 1 million per year would drop to about 31% (from 27%), according to Hoagland. It would drop to 32.5% (from just over 30%) for those with incomes above $ 1 million, he said.
The change would increase $ 131 billion in federal revenue through 2026, according to a US Treasury Department estimate released in May.
Increase the capital gains tax
The maximum tax rate on long-term capital gains is also expected to increase.
The Biden administration has proposed increasing that maximum rate to 39.6% – the same as the proposed maximum rate on ordinary income – for those earning more than $ 1 million a year. (Combined with a 3.8% surtax on net investment income, the maximum federal rate would be 43.4%.)
Wealthy people derive a large portion of their annual income from investments, which means raising taxes only on wages may not tax their total income as effectively as Democrats would like, experts say.
According to the Tax Foundation, those with annual income over $ 1 million get about 40% of their income from their investments, compared to just 5% for those earning less than $ 50,000 a year.
However, some experts are skeptical. Democrats will be able to raise the rate of long-term capital gains (which are due on investments held for more than a year) to 39.6%.
âI would expect some increase, bringing it closer to the individual rate,â Hoagland said. “But not at all up to the individual price.”
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Democrats will also likely try to change the way valued assets owned by the rich are passed on to heirs.
The White House, for example, has proposed imposing a capital gains tax on death, with a few exceptions.
âIt would be a much bigger change than just changing the rate of capital gains,â Abraham said of the proposed policy.
Currently, the capital gain of an asset is not taxed on the death of the owner. The asset benefits from a base increase, which means that it is transferred to the heirs at its current market value, thus wiping out the capital gain. The heirs could then sell the asset free of capital gains tax.
(Very wealthy estates owe a 40% federal inheritance tax under current law, on values ââexceeding $ 11.7 million for individuals and $ 23.4 million for married couples.)
Capital gains tax reforms would bring in $ 322.5 billion over a decade, according to a Treasury estimate.
Democrats are also considering tax compliance to increase income for households earning more than $ 400,000 a year.
Under-reported income, largely among the wealthy, is the biggest contributor to what’s known as the tax gap, according to a May Treasury report.
The Treasury estimated the gap (the difference between tax paid and tax owed) at $ 584 billion in 2019. About 80% of the gap stems from âopaque revenue sources,â such as partnerships, sole proprietorships and rental properties, which mostly belong to the rich, the Treasury said.
The Biden administration has called for more third-party reporting to the IRS to improve tax compliance.