Many Americans still don’t realize that we have a bifurcated tax system.
One tax table is focused on taxing Americans on their ordinary income, the income you earn from your job or your business.
The other tax table is focused on taxing your long-term capital gains, meaning assets that have grown in appreciation, such as stocks or your business value held more than 365 days.
With thousands of pages in the tax code, it’s nearly impossible for most Americans to really understand how they are taxed, let alone understand the nuances between capital gains, ordinary income tax and how that could affect your personal economy and the stock market.
BIDEN’S TAX-HIKE PLAN WOULD COST THE US ECONOMY NEARLY 800K JOBS
According to a report issued by the Treasury Department, led by Secretary Janet Yellen, Biden’s proposed fiscal year 2025 budget would increase the top marginal rate on long-term capital gains and qualified dividends to an astonishing 44.6%.
Today, that top marginal long-term capital gains rate is at 23.8%. Do NOT get fooled when you hear or read that the increase is ONLY a 20.8% increase, when in fact it would be an 87.4% increase!
Here’s the breakdown of how this tax would increase by almost 100%.
First, the top ordinary income marginal tax rate would increase from 37% today to a future rate of 39.6%.
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Second, the top long-term capital gains marginal tax rate would adjust to the top ordinary income marginal tax rate, meaning it would move from 20% to 39.6% for capital gains.
Third, let’s remember recent relevant history with the tax code. The Affordable Care Act was signed into law on March 23, 2010, and instituted the ObamaCare surtax of 3.8%, or what is known as the net investment income tax (NIIT). It took two years later for the Supreme Court to render a decision about whether this tax was even constitutional, and it finally went into effect on Jan. 1, 2013.
The most important part of this tax centered on what types of income are subject to this new tax. Gains from the sale of stocks, bonds, mutual funds, investment real estate and interests in partnerships and S corporations were all under the umbrella of NIIT. The president is now proposing that this tax moves from 3.8% to 5%.
If you add the proposed 39.6% capital gains tax plus the 5% NIIT, it is how the overall 44.6% would be enacted if the current administration has its way.
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Why would this crush the economy?
If these new policies take effect when the Tax Cuts and Jobs Act (TCJA) of 2017 expires at the end of 2025, we will be staring down a barrel in 2025 of millions of Americans selling off their highly appreciated stock positions at today’s long-term capital gains rates versus paying double in 2026.
The simplicity of this is that the law of supply and demand holds true with the stock market. The fear is that selling begets more selling, and if investors that are long-term holders of individual stocks get nervous that double the taxation is imminent, you could see many investors head for the exits in a significant way, especially if Congress, the Senate and the White House are a sea of blue.
As an owner of multiple small businesses, most entrepreneurial wealth is created is the enterprise value of your company.
Many business owners tie their wealth up in two asset categories: real estate and business ownership. (Remember, these are the individuals who create 62.7% of all jobs in the U.S.) If the new capital gains rules take effect, entrepreneurs would have to grow the value of their business by 50% to net the same money that they would if they sold the business today.
What you could see as an outcome with the suggested long-term capital gain rate rules is business owners much more aggressively putting their companies on the market for sale to pay fewer taxes.
This could also have a significant trickle-down effect on people losing their jobs as smaller companies consolidate into larger ones and could also stagnate the germination of new businesses as the upside potential to take on financial, legal and personal risk may not give entrepreneurs the excitement to launch businesses like they have in the past.
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Under the new proposed Biden tax plan, 10 states would have more than a 50% capital gains tax, with California being the highest at 57.9%. Those that have investment real estate in their portfolios may also consider selling these properties and if interest rates remain high, it could put a glut of properties into the marketplace where we struggle to find future buyers, including millennials and Gen Zers, who are falling far short today to muster up even a down payment on a new home.
These are really dangerous proposals that all Americans need to study closely. If you think the economy is tough now, and you are worried about inflation staying high, just watch what happens at a 44.6% top capital gains rate when it comes to really investing in the future of America.
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Original article source: Why Biden’s almost 100% capital gains tax increase would crush the stock market