(Politicizd) --- Since the formality of President Biden's electoral win last November, many Americans have expressed fear at the potential re-establishment of an increasingly paralyzing tax rate. Yesterday, that reality came true as Biden reiterated his campaign promise. Biden, only 3 months on the job, announced he plans to raise taxes in order to further education and child care funding.
The proposal, known as the American Families Plan calls for raising the top marginal income tax rate, from 37% to 39.7%. It also proposed an astounding doubling of the capital gains tax, from 20% to 39.6%.
The move represents an unprecedented change in government policy which has historically taxed successful investments at significantly lower rates than one’s regular yearly income.
According to an analysis by the Tax Policy Center, the new proposal could cost the richest Americans upwards of $300,00 annually. To the contrary, the analysis concluded the lowest earning Americans would see an average tax increase of just 250$.
"The proposals would increase taxes on average on all income groups, but the highest-income households would see substantially larger increases"
(Statement from the Tax Policy Center)
Consequently, Senate Minority Leader Mitch McConnell (R-KY) assured constituents the GOP, would not support “massive tax increases on all the productive parts of our economy". The declaration was then furthered by several other Republican colleagues, including Senator Ted Cruz, and ’Never Trumper‘, Senator Mitt Romney.
Further stated, Republicans argue the potential tax hike would have lasting effects on the recovery of rejuvenating economy.
So What Are The Political Consequences of Raising the Capital Gains Tax?
For starters, in an environment meant to encourage risk taking, the new rate would do the opposite. As investors face a more challenging pursuit of profit, there will be an increased disinterest in buying more assets. Moreover, investors would be less likely to invest, placing an adverse effect on an otherwise growing economy.
In fact, Republican Chuck Grassley, an important member of the Senate Finance Committee remarked, “It’s going to cut down on investment and cause unemployment" (referring to Biden's potential Capital Gains Tax)
Additionally, critics worry that in previously high taxed states, the new increase would create unbearably high tax rates. For example, in New York, with the already existing 3.8 percent surtax, meant to fund ObamaCare, along with an investment tax rate of 43.4 percent, the combined state and federal capital-gains rate could end up at 52.22 percent. Thus, it is entirely conceivable that residents of the state flee to other areas where state income taxes do not exist. Evidently, this has already happened where Florida and Texas will now have several more congressional seats, as per the 2020 Census. Notably, New York has already lost two congressional seats, falling to the fourth place, in the population rankings.
Politically speaking, the increased rates will begin a decades long battle on the appropriate tax rates, and more shockingly, begin the enhanced exodus of citizens from areas with high state income taxes. It is believed, this will influence more New Yorkers and Californians to relocate in Texas and Florida, thus adding more and more Republican held congressional seats. As for the 2032 Presidential Election, is it expected that the Republican Candidates will gain an even bigger advantage in the already Republican- favorable electoral college.
Overall, the latest tax proposal coincides with the historic tendency of tax increases under Democratic administrations.
Whats Next: Biden is expected to unveil the official proposal next week before his scheduled address to a joint session of Congress on April 28.