Democrats want wealthy Americans and corporations to pay higher taxes to fund a $ 3.5 trillion budget that includes paid family vacations, childcare, and other social expenses.
That emerges from proposals published by the House Ways and Means Committee on Monday. The influential group of lawmakers is proposing increases in capital gains taxes and other tweaks to tax law to collect more of wealth taxpayers – but less dramatic than President Joe Biden’s proposed tax increases, experts say.
Both Biden and the legislature under the democratic ranks of Congress have in mind more income taxes, more capital gains taxes, and less depreciation, which allow people at the top of the income ladder to cut their tax bills.
But the Ways and Means Committee’s proposals “don’t go as far as the Biden government’s proposals,” said Steve Wamhoff, director of federal tax policy at the left-wing Institute for Tax and Economic Policy.
The committee’s proposal comes months after Biden unveiled his own proposal for tax hikes, which included a higher peak income tax rate, a higher capital gains tax rate for millionaires, and an offer for finally tax the “unrealized” wealth of the rich keep it without a tax assessment and pass it on to the next generation.
For Wamhoff, “there are important improvements, but there are some important things that are left out” of the House of Representatives proposal – including Biden’s idea of taxing assets that add value when the wealthy owner dies. “The Ways and Means suggestion just skips that,” said Wamhoff.
Compared to the president’s proposals, the Ways and Means proposal is “in some ways a little more taxpayer-friendly” and “a little less aggressive,” said Kyle Pomerleau, a senior fellow at the American Enterprise Institute, a right-wing think tank.
Lower rates of return on capital, but a premium for the wealthy
One example is taxes on investment income. Currently, the wealthiest households pay a 20% tax plus a 3.8% tax related to the Affordable Care Act.
Under Biden’s plans, millionaires would pay a total of 43.4% on their capital gains, Pomerleau noted. That’s a capital gains rate of 39.6% – which corresponds to an increased income tax rate – plus the 3.8% ACA-related tax.
As suggested by the Ways and Means Committee, a millionaire would pay 28.8%, which is a capital gain rate of 25% plus the ACA-related rate of 3.8%. A household making more than $ 5 million would also have a 3% surcharge, which translates into an effective capital gains rate of 31.8%, noted Pomerleau.
The House of Representatives proposal “spreads the impact a little but doesn’t make it as strong,” said Tara Thompson Popernik, senior vice president and director of research at Bernstein Private Wealth Management, a subsidiary of AllianceBernstein’s wealth management company.
It is important to understand what is being offered in the Ways and Means proposal, Pomerleau said. That’s because the Democrats in Congress have to master a tightrope to get their budget and the associated tax hikes through in the US House of Representatives and Senate. “This is a strong sign of the direction Congress will go in tax policy,” when it comes to the current budget process, he said.
Karine Jean-Pierre, the White House’s principal deputy press officer, told reporters Monday that the House Ways and Means Committee’s proposal was a “first step” and that Biden would continue to work with Congress. She also said she “will not negotiate from here” and will instead “go through the trial” on Capitol Hill.
Here’s a look at the similarities and differences between Biden’s proposals and the Committee on Ways and Means’ new proposal:
Reset the top rate to 39.6% – but for different income levels
In 2017, then-President Donald Trump signed the Tax Cuts and Jobs Act, which lowered the top tax rate from 39.6% to 37%.
Both the Biden and Ways-and-Means plans would reset the top rate to 39.6%, but they kick in at slightly different points. The Biden Administration would start the top tariff at $ 509,300 for married couples and $ 452,700 for unmarried individuals. The Ways and Means suggestion is that the rate should start at $ 450,000 for married couples and $ 425,000 for unmarried people. after a suggestion.
The Ways and Means proposal also provides a 3% surcharge on any modified adjusted gross earnings above $ 5 million.
Different timing for capital gains tax increases
The Ways and Means Committee’s plan makes wealthy households pay more taxes on their wealth – but not as much as Biden’s plan.
The Biden proposal said wealthy taxpayers should pay as much for their stock sales and investment portfolios as they do for their income. As a result, Biden said the highest income tax rate of 39.6% should also be the capital gains rate for millionaires and above.
In the Ways and Means proposal, anyone currently paying the 20% capital gains tax rate would pay 25%, Popernik noted. Currently, the highest rate of capital gains is typically $ 496,600 for married couples and $ 441,450 for individuals. according to the IRS.
To reduce the potential for wealthy taxpayers to take advantage of the preferential 20% tax before a higher tax rate goes into effect, the von Biden government said the new tax rate would be retroactive and go into effect on April 28, 2021, the day the President officially presented his ideas to Congress.
The Ways and Means proposal is that a higher capital gain rate would go into effect on September 13, the formal date the bill was introduced.
Conclusion: “A transitional regulation provides that the previous statutory tax rate of 20% continues to apply to profits and losses for the part of the tax year before the introduction.”
For a wealthy person selling stocks or some other capital value in 2021, the previous rate would apply if they did so before Monday, Pomerleau explained.
Popernik said she generally does not advise people to rush to sell capital gains in the circumstances. With just three months to go until the end of the year, many people could suddenly face a huge tax burden that they weren’t previously budgeted for, she said.
More exams for wealthy taxpayers and wealthy people only
There is no daylight between the President’s proposal and the House of Representatives when it comes to pouring more money into the Internal Revenue Service to ensure that all taxpayers – especially the richest – pay their full tax bills.
The Ways and Means Committee’s new proposal provides $ 78.9 billion to strengthen tax enforcement and update the aging information technology systems of the IRS. The money is earmarked to ensure everyone pays for their full freight, “except that no use of those funds is to raise taxes for taxpayers with taxable income below $ 400,000,” the proposal added.
The Biden government asked for $ 80 billion for the agency. Last week, an official from the Treasury Department said investments cannot come fast enough because too many wealthy households are evading taxes. The 1% are responsible for more than a quarter of unpaid taxes in the $ 600 billion annual gap between taxes owed and taxes actually paid, wrote Natasha Sarin, assistant secretary of state for economic policy.
Targeting Roth IRAs
Biden’s plan was released without discussion of any new rule changes for Roth IRAs.
But that was before the investigative news agency ProPublica published a story that said Peter Thiel, the co-founder of PayPal, managed to do a Roth IRA worth less than $ 2,000 in 1999 into a $ 5 billion nest egg. Since Roth IRAs are funded with post-tax money, any money they contain is spent tax-free when distributed. (Thiel did not respond to a request for comment from MarketWatch.)
Thiel reportedly used the account to buy 1.7 million PayPal shares for less than a cent a share, according to the June story. The story caused quite a stir – and some data collections by the federal authorities. Almost 25,000 people In 2019, Roth had IRAs and traditional IRAs (with pre-tax money) with balances between $ 5 million and $ 10 million, according to the Senate Finance Committee.
The Ways and Means Committee’s proposal is aimed at people with vast amounts of wealth in retirement accounts.
Among other things, the proposal limits annual contributions to an IRA or Roth IRA when the total value of retirement accounts plus a defined contribution account (such as a 401 (k) plan) “generally exceeds $ 10 million at the end of the previous period”. Tax year. “
The caps apply to married couples earning over $ 450,000 and individuals over $ 400,000. The proposal would also include required minimum distributions for these individuals.
The language is definitely an answer to the Thiel story, said Popernik. “If I’m a person with a very large IRA, that will feel like a punishment.”
Pomerleau says he’s not sure if changes to the Roth IRA rules will be incorporated into final legislation. But it shows that when there is a lot of money and wealth involved in IRAs, “there is at least some political pressure to do something”.
Victor Reklaitis contributed to this report.