White House press secretary Jen Pskai confirmed at a press conference on Thursday that President Joe Biden plans to submit to Congress a 43.5% capital gains tax for the wealthiest investors.
Pskai confirmed that “we’re still finalizing what the pay-fors look like.” Biden is expected to announce the proposal as part of an across-the-board tax increase to support the White House’s “American Families Plan.”
The tax would increase to 39.6% for individuals with incomes over $400,000 a year, and for people with incomes over $1 million the increase would be as high as 43.5%. The tax currently stands at 20 %.
Financial and cryptocurrency markets suffered a drop with the announcement of the capital gains tax increase
Following the announcement, the financial markets suffered their biggest drop all month, with financial indices such as the Standard & Poor’s 500 down 1.2 % in valuation.
According to David Kostin, an analyst at Goldman Sachs Group Inc. in a report published in October 2020, the capital gains tax hike would have a momentary negative effect on the behavior of financial markets, “however, any potential sell-off in capital will be short-lived and will reverse in subsequent quarters,” clarifying that the impact of this tax will not affect the behavior of financial markets in the long term.
Kostin clarifies that logically the biggest impact will be suffered by those companies that have performed better over the past year, such as Tesla, with its 400 % increase, and the companies of the FAANG block (Facebook, Amazon, Apple, Netflix and Google/Alphabet).
The cryptocurrency market wasn’t spared from the panic caused by the capital gains tax announcement. Bitcoin fell below $50,000, declining 5 % after Pskai’s press conference; other cryptocurrencies such as Ethereum and XRP fell around 7 %.
New York and California will become a tax headache for investors
Those investors whose capital gains income exceeds $1 million could face a combined tax rate of 52.22% in New York, and in California the increase would be as high as 56.65%.
In other states such as Hawaii the tax would exceed 54.65 % of investors’ income, while in New Jersey the tax would rise to 54.4 %. In at least 18 states in the Union, the capital gains tax for the wealthiest investors would exceed 50%, if the increase proposed by the Biden administration is approved.
In Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, investors would only face the federal tax rate of 43.65%, as these states do not have their own capital gains tax.
The other taxes that will come with Biden’s tax reform
President Biden’s tax reform plans to have a “progressive” approach where, according to him, only the wealthiest Americans will be affected by higher tax payments. Among the taxes considered by the reform is an increase to the corporate tax from 21% to 28%, reversing the decrease made by former President Trump’s Tax Cuts & Jobs Act.
Rental income over $400,000 would also see an increase in the marginal tax rate from 37% to 39.6%.
Treasury Secretary Janet Yellen also plans a corporate tax on foreign income of 21%, a tax she has lobbied the G20 to implement globally to deter tax avoidance through tax havens.