Will Taxes Rise for the Wealthy?

The latest major initiative from the White House—a package of social measures known as the American Families Plan, comprising expanded child care assistance, two years of free community college, universal prekindergarten, and more—includes proposed tax increases on the wealthy to help fund the plan.

Among other things, the Biden administration’s proposal would:

  • Raise the top individual tax rate back to 39.6%—after previously being reduced to 37% by the Tax Cuts and Jobs Act of 2017.
  • Tax long-term capital gains and dividend income at ordinary income tax rates for individuals earning more than $1 million annually.
  • End the step-up in cost basis at death, which adjusts the cost basis of inherited assets to the fair market value at the time of inheritance when calculating capital gains taxes.

The plan also includes $80 billion for the IRS to help improve the tax-collecting process. (According to the Treasury Department, every dollar spent on tax enforcement by the IRS generates about $6 in revenue.) Such efforts are likely to affect the top 5% of taxpayers, including business owners, corporations, and the wealthy.

Of course, the president’s proposal is just that—a proposal. It will take an act of Congress to turn the White House’s proposed American Families Plan into legislation—and there’s a good chance that what emerges, if anything, will look very different from what the White House has initially outlined. That said, our view is:

  • The increase in the top individual tax rate has the broadest support among Democrats—and therefore the best chance of being approved.
  • Changes to the capital gains tax rate and basis step-up rule, which are not yet universally embraced by all Democrats on Capitol Hill, will be subject to considerable intraparty negotiations.