Biden Administration's Revenue Proposals Include Massive Capital Gains Tax Increases

You may have heard in the news or have read articles about Biden Administration's proposal to increase capital gains taxes as high as 44.6%. In May 11, 2024, the Department of Treasury published General Explanations of the Administration's Fiscal Year 2025 Revenue Proposal. Within this documents we can see that Biden indeed is proposing to increase the capital gains tax, tax on unrealized gains, and other investment taxes. If you read the article posted on Forbes you may get an impressions that most of this news has been exaggerated and the Administration is main targeting super wealthy . If you read other opinions, it is clear that intention are to increase revenues through more taxation, not necessarily creating a more fair taxing as they would claim.

It is probably rare to find people who like taxes. Even though many of us may dislike or disagree with various taxes, they may be necessary in some situations. However, there are many problems with taxes. Some taxes don't make sense, some taxes are absolutely ridiculous. It is impressive how governments become very creative when it comes to taxes and come up with many different types of them. I am not against taxes. I believe there is a need for taxes to cover certain expenses that are needed for society to operate and prosper. Unfortunately, that is not how most taxes are used, and often there is a lot of dishonesty involved from politicians, and a lot of misspending due to corruption or incompetence. Fiscal responsibility is completely absent when it comes to public money.

The main problem with taxation of any kind is ability or willingness of government entities to use this revenue to improve things within the country, to better things for society, to build useful things for people, to offer services that create efficiencies, to spread compassion and care for all. There are many good things that this bureaucratic machine is already setup to do. Sometimes inefficient, but mostly works ok. However, I can't think of single new thing that have contributed something great and had a positive economic impact by using the tax money. Even when find a thing or two, those actions almost always come with 10 times wasteful spending attached.

Nation debt have reached the all time highs in crazy numbers. At this point I doubt anybody thinks US national debt will ever be paid off. I wonder if there ever was an intention to paid off. We are probably just paying the interest at this point, if at all. Continuous borrowing keeps growing and growing. Now, this necessitates increase in taxation. Not because there is some unfair system, or some intentions to pay off debt, or build a better future. It is because bankers were promised that would be paid by the money received in taxes. Old taxes keeps getting increases, new tax types created, and all without any good results. For these reasons, I do not think there is a need for more taxes or increasing the tax rates. "No increase for wealthy, no increase for poor, no increase at all" is what I would prefers. I could change my mind if there was solid plan to bring tangible improvements that would help many, if there were actions that prove those who make such claims can actually deliver.

You don't need to read the full report linked above. It is boring. Search the key words "capital gains" and "unrealized" to get some idea what the plans are. Sure higher taxes will be for more wealthy. But we know that is not where they stop. Also, when things go to Congress and negotiated, we can be sure ordinary people will get the most burden of all taxes anyway.

Currently, short-term capital gains taxes are taxed similar to ordinary income. Now the long-term capital gains is what is interesting. It may be 15% or 20% depending how much you made. Or even 0% is you have made more than certain amount in total income. I think it was about $40,000. So the top tier would pay 20% in capital gains now. With Biden's proposal this number would go up to 39.6% and adding increased net investments income tax this number would go as high as 44.6%.

A separate proposal would first raise the top ordinary rate to 39.6 percent (43.4 percent including the net investment income tax). An additional proposal would increase the net investment income tax rate by 1.2 percentage points above $400,000, bringing the marginal net investment income tax rate to 5 percent for investment income above the $400,000 threshold. Together, the proposals would increase the top marginal rate on long-term capital gains and qualified dividends to 44.6 percent. [proposal, page 80, footnote 18]

One of the main reasons for these proposals they keep repeating is this:

Preferential tax rates on long-term capital gains and qualified dividends disproportionately benefit high-income taxpayers and provide many high-income taxpayers with a lower tax rate than many low- and middle-income taxpayers.

I am not sure I believe that. What they don't hide and also state clearly is that the goal is to increase the revenue. While I appreciate the honestly, I disagree this is the right path to take. I would like to suggest a different idea. Keep all bitcoins that treasury and other government agency hold in custody now, make a public statement that now US government is invested in bitcoin and will never sell, or won't sell anytime in near future. Now that would create some revenue. Moreover, consider in actually investing in bitcoin and decentralized standards. Perhaps this may help with lowering the national debt at some point, or eliminating it eventually.

If such proposal were to go through legislature and anything close to it became a law, this probably wouldn't be a good news for anybody. First, I am pretty sure the rates will increase for everybody. Even if super high rates are implemented to wealthy, they will have resources to reallocated their assets in advance to avoid paying any taxes. This reminds a story that Michael Saylor told in one of the interview. That may have been a true story. I don't remember what country or city it was, it was about a port city. There were many yachts parked at the port, wealthy people's yachts. The port was always busy and kept local economy busy. One day local government announced that yachts are parked in the port for free and haven't been paying any taxes. Starting certain date they were going to implement taxes for parking the yachts at the port. When that date arrived, there were no yachts left in the port. They all departed and found a more friendly port without aggressive taxation. This resulted in local economy collapsing, and once busy and vibrant port town turned into a ghost town.

In this story Michael Saylor was trying to make a point about assets that can easily move. For example if governments were to implement taxes for assets that can easily move, they would move to more favorable jurisdictions. Similarly, wealthy have many resources, connections, and experts that can easily figure out where to move their assets and investments to continue preserving their wealth. This may produce negative results for local or national economies. The entire world is a destination for wealth.

When I heard about unrealized gains tax, it never made sense. How can you tax unrealized gains. Sure gains are in paper, but they aren't real. Maybe it makes a difference how much these unrealized gains are. But math dictates it would still be same, and carry same risks. Regardless if I have thousand dollars in unrealized gains or billions, don't they hold the same risk of disappearing any time? Correct me if I am wrong, but I think risks are same, and until gains are realized they are non-existent. So, Biden's proposal does include taxing unrealized gains as well. However, this tax is for super wealthy.

Under current law, the preferential treatment for unrealized gains produces an incentive for taxpayers to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding capital gains tax on the appreciation, rather than reinvesting the capital in more economically productive investments.

This is how they are reasoning the introduction of unrealized taxes. There is some truth in it. We already know, one of the ways to preserve wealth is holding wealth in assets and not realize gains, and instead borrow money with putting investments as collateral. That is how the system works. What I don't agree with is that investors wouldn't reinvest. They do so all the time. And how does the government with massive national debt would know what investments would be more economically productive? Nice joke.

The proposal would impose a minimum tax of 25 percent on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) greater than $100 million.

Wow. 25% on unrealized gains. That is insane. This is not even a one time tax, this will be done every year. It seems to be a very stupid idea. Now if you are going to tax unrealized gains with 25% tax who would want to have unrealized gains? Who would want to invest? It seems like just keeping the wealth in cash would be a better option. I am not sure this would encourage any investment in economy. If you add increase in capital gains tax, investment will not be attractive any more, would it?

Yes, we would have to have $100 million and more in net assets to be eligible for this generous unrealized gains tax, and most of us are not. But we don't want this money to flow out of the markets. We need big money in the markets to keep the markets efficient. Also, this would only be the beginning of unrealized taxes. Once it becomes are norm, it in near future we will see similar taxation for lower income and investment tiers as well.

In general, I think the current taxes are super high already. In my opinion when you add up all the taxes paid they shouldn't be more than 10%. If they are then, it is a lot of taxes. One tax alone is much higher than 10% today. It is only wishful thinking taxes will ever go down. They almost always go up. What I can with for is, at least these taxes to be used for meaningful, productive, and positive things. Let me know your thoughts in the comments.