Marking 100 days in office, US president Joe Biden has set out plans to increase capital gains tax and top income rates, in a move which will hit the wealthiest US taxpayers
President Biden proposed a rise to the tax rate on long-term capital gains for Americans who make more than $1m (£716,925) in a year, raising it from 20% to 39.6% and will increase taxes that hedge funds pay on carried interest with an additional 3.8% of the highest earning Americans paying a total tax rate of 43.4% on profits from long-term investments.
The top tax rate will also rise from 37% to 39.6% for those earning $400,000 (£286,770) annually. This means the rate will return to the same level seen before the 2017 tax cuts implemented during the Trump administration.
Biden has asked Congress to wipe out a preferential tax treatment for private equity executives and other money managers earning millions of dollars annually on carried interest. Over the last few years, private equity executives and managers have paid 23.8% in federal tax because their compensation was treated as a long-term capital gain. Because of this, many private equity managers pay a lower rate than households with married people filing their taxes jointly were paying on income above $171,050 (£122,642).
Biden campaigned on equalising the capital gains and income tax rates for wealthy individuals, saying it was unfair that many of them pay lower rates than middle-class workers. These changes will make the rate on investment gains similar to the rate on income made from working.
President Biden’s new economic plan would also eliminate a tax break for many real estate owners that has enabled them to defer paying capital gains on property sales. The current law allows investors to defer paying tax on real estate gains if they reinvest the proceeds in other properties within six months of the sale. The deals, known as 1031 exchanges, will be abolished on real estate profits of more than $500,000 (£358,500).
The capital gains tax from these deals does eventually get paid, but many real estate investors continue to buy and sell properties this way until they die, passing the capital gains on to their heirs tax-free at death. Biden is also planning to close the death loophole by taxing capital gains on inherited assets.
In response to Biden’s proposals yesterday Daniel Hyde, a partner at Blick Rothenberg said: ‘The impact of these proposals for Americans living in high taxed states and cities cannot be underestimated with taxpayers in New York or California for example being taxed at close to or over 55%.
‘Senior executives in the fund management industry, especially in New York, may find these rates untenable and may look to London as an attractive alternative especially in light of the non-dom regime. Of course, a move to London does not remove the federal tax but 43.4% may still look a lot more attractive than nearly 55% and even the threat of higher UK taxes could still place London as a possible destination. If UK capital gains tax rates remain competitive, I anticipate an increasing number of conversations around the renouncement of US citizenship in favour of permanent settlement in the UK.’
In March, Biden announced proposals to raise the federal corporate income tax rate from 21% to 28% with a 15% minimum tax on book income of large companies that report high profits of over $2bn (£1.46bn) in income. The money raised from the tax hikes will be used to help pay for the Democrat’s $2.7 trillion American Job Plan and other significantly costly social programmes.
President Biden will next sit down with congressional leaders from both chambers at the White House on May 12.