2020 Democrats push tax hike on wealthy investors

2020 Democrats push tax hike on wealthy investors
© Getty

Democratic presidential candidates are calling for increasing taxes on capital gains, a move they argue would make the tax code more fair and help to reduce income inequality.

Many of the candidates have suggested they might raise tax rates on investment gains and end breaks that allow people to minimize their capital gains tax bills.

People pay capital gains taxes when they sell investments. Currently, the top tax rate on long-term capital gains is 20 percent, plus a 3.8 net investment tax for high earners. By contrast, the top rate on individuals’ ordinary income, such as wages, is 37 percent, plus 3.8 percent in Medicare taxes. Analysts have estimated that most of the benefits of the lower capital gains rates go to high-income taxpayers.

Former Vice President Joe BidenJoe BidenMark Kelly clinches Democratic Senate nod in Arizona Hillicon Valley: NSA warns of new security threats | Teen accused of Twitter hack pleads not guilty | Experts warn of mail-in voting misinformation Biden offers well wishes to Lebanon after deadly explosion MORE, currently leading in many polls, has repeatedly said at campaign events that he thinks capital gains taxes are too low, though he has not specified what he thinks the ideal tax rate should be.

ADVERTISEMENT

“We need to get rid of these capital gains cuts and loopholes for the super-wealthy,” Biden, one of the more centrist candidates in the 2020 Democratic field, said at a rally in Iowa in April.

Biden has focused many his comments on eliminating a tax preference often called “step-up in basis,” saying that doing so would raise revenue to cut college costs and reduce the deficit. 

Under step-up in basis, people can transfer investments to their heirs without the investments being taxed at the time of their death. When their heirs sell the investments, they don’t have to pay capital gains taxes on the value that the investment appreciated before they received it.

Sen. Bernie SandersBernie SandersLongtime Rep. Lacy Clay defeated in Missouri Democratic primary Hillicon Valley: NSA warns of new security threats | Teen accused of Twitter hack pleads not guilty | Experts warn of mail-in voting misinformation Schiff, Khanna call for free masks for all Americans in coronavirus aid package MORE (I-Vt.), who is known for his progressive views, supports taxing capital gains and dividends the same as income from work, according to his campaign.

During his 2016 presidential campaign, Sanders proposed taxing the capital gains and dividends of high-income taxpayers at the same rates as ordinary income, and taxing capital gains at death and when a gift is made.

Sen. Cory BookerCory Anthony BookerUSAID appointee alleges 'rampant anti-Christian sentiment' at agency OVERNIGHT ENERGY: EPA rule extends life of toxic coal ash ponds | Flint class action suit against Mich. officials can proceed, court rules | Senate Democrats introduce environmental justice bill Senate Democrats introduce environmental justice bill MORE (D-N.J.) and former Rep. John DelaneyJohn DelaneyCoronavirus Report: The Hill's Steve Clemons interviews Rep. Rodney Davis Eurasia Group founder Ian Bremmer says Trump right on China but wrong on WHO; CDC issues new guidance for large gatherings The Hill's Coronavirus Report: Kansas City Mayor Quinton Lucas says country needs to rethink what 'policing' means; US cases surpass 2 million with no end to pandemic in sight MORE (D-Md.) have both said that they want to tax investment gains and wage income the same and use the revenue raised from the change to help offset the cost of expanding the earned income tax credit — a refundable tax credit that benefits low- and middle-income workers.

“By pairing [an expansion of the credit] with the capital gains increase, I’m making it very clear to the world where my priorities are, which is we should use the tax code to benefit workers,” Delaney said in an interview with The Hill.

Rep. Seth MoultonSeth MoultonPortland: The Pentagon should step up or pipe down House panel votes to constrain Afghan drawdown, ask for assessment on 'incentives' to attack US troops Overnight Defense: House panel votes to ban Confederate flag on all Pentagon property | DOD report says Russia working to speed US withdrawal from Afghanistan | 'Gang of Eight' to get briefing on bounties Thursday MORE (D-Mass.) recently released a tax plan that included equalizing tax rates for capital gains and ordinary income and ending step-up in basis.

“People rightly view the tax system right now as unfair,” Moulton told The Hill. 

“It’s not fair that Warren Buffett pays lower taxes than his secretary,” he added, referencing the billionaire Berkshire Hathaway CEO.

Former Rep. Beto O’Rourke (D-Texas), former Colorado Gov. John HickenlooperJohn HickenlooperObama announces first wave of 2020 endorsements Gardner says GOP committee should stop airing attack ad on opponent Hickenlooper Democrats' lurch toward the radical left — and other useful myths MORE (D) and Sen. Amy KlobucharAmy KlobucharLobbying world Biden should pick the best person for the job — not the best woman House committee requests hearing with postmaster general amid mail-in voting concerns MORE (D-Minn.), are also among the 2020 candidates who want to tax capital gains and ordinary income at the same rates. O’Rourke and Hickenlooper have also called for ending stepped-up basis, and Hickenlooper wants long-term capital gains to be indexed to inflation while taxed at ordinary income rates. That change would reduce the amount of gains subject to taxes compared to if the gains weren't indexed.

A Democratic president who wants to increase capital gains taxes would have support from a key ally in Congress. Sen. Ron WydenRonald (Ron) Lee WydenTensions flare as GOP's Biden probe ramps up  Frustration builds as negotiators struggle to reach COVID-19 deal On The Money: Unemployment benefits to expire as coronavirus talks deadlock | Meadows, Pelosi trade criticism on stalled stimulus talks | Coronavirus recession hits Social Security, Medicare, highway funding MORE (D-Ore.), the top Democrat on the tax-writing Senate Finance Committee, is working on a proposal to tax wealthy people’s investment gains annually — instead of just when investments are sold — at the same rates as wage income.

“To ensure wealthy Americans pay their fair share of taxes, we need to close capital gains loopholes and equalize the tax treatment of wages and wealth,” Wyden said in a statement to The Hill. 

Tax experts say that 2020 Democrats are taking a more full-throated approach to calling for higher capital gains taxes than they typically have in the past. 

Former President Obama proposed raising capital gains rates for high earners to 28 percent, still short of the top ordinary income tax rate. During the 2016 presidential campaign, Democratic nominee Hillary ClintonHillary Diane Rodham ClintonThe Hill's Campaign Report: Even the Post Office is political now | Primary action tonight | Super PACS at war Should Biden consider a veteran for vice president? Biden leads Trump by nearly 40 points in California: poll MORE proposed increasing capital gains rates for investments held in the medium term but proposed keeping the top long-term rate the same. And Democrats in the past have also focused much of their talk about capital gains narrowly on ending capital gains tax breaks for the carried interest earned by investment-fund managers.

“This time around, people are willing to take on the much bigger issue,” said Steve Wamhoff, director of federal tax policy for the left-leaning Institute on Taxation and Economic Policy.

Advocates of higher taxes on the rich see the growing consensus from Democratic candidates on capital gains as positive news.

“I’m excited by this development,” said Frank Clemente, executive director of Americans for Tax Fairness Action Fund. “Democratic candidates are recognizing how unfair it is that the richest Americans can pay a tax rate that’s half of what they should be paying.”

The interest from some Democratic presidential candidates in higher capital gains taxes is one of several ideas candidates have proposed to increase taxes on the wealthy. For example, several candidates have proposed increasing the estate tax, and Sen. Elizabeth WarrenElizabeth WarrenTrump says government to review 5M Kodak loan deal Michelle Obama supporters urge Biden to pick former first lady as running mate On The Money: Unemployment debate sparks GOP divisions | Pandemic reveals flaws of unemployment insurance programs | Survey finds nearly one-third of rehired workers laid off again MORE (D-Mass.) has floated a wealth tax.

The exact amount of revenue that can be raised from increasing capital gains taxes depends on proposals’ details, tax experts said.

Supporters of taxing capital gains more said that increasing rates alone won’t raise the kind of revenue that Democrats are seeking, since people will hold onto their investments for longer if rates are higher. Experts said that candidates should also call for other changes in addition to higher rates, such as ending step-up in basis and requiring investment gains to be taxed annually.

Democrats’ approach is vastly different from the stance of Republicans, who generally think that capital gains taxes should be cut in order to increase incentives for investment and saving.

President TrumpDonald John TrumpMark Kelly clinches Democratic Senate nod in Arizona Trump camp considering White House South Lawn for convention speech: reports Longtime Rep. Lacy Clay defeated in Missouri Democratic primary MORE’s campaign blasted Democrats for proposing tax increases, saying Democrats will need to impose tax hikes to pay for plans such as government-run health care and a Green New Deal.

“Americans are enjoying what may be the strongest economy in history, and raising taxes is the surest way to derail it,” Trump campaign communications director Tim Murtaugh said in a statement. 

Ryan Ellis, president of the conservative Center for a Free Economy, said that if Democrats’ position on capital gains is discussed along with their position on Medicare for All and the Green New Deal, “it becomes part of the argument that they are too radical to be elected.”

Trump has said he’s considering taking executive action to reduce capital gains taxes by indexing capital gains to inflation.

Democrats in Congress fiercely oppose such a move, saying it would increase the deficit and largely benefit the wealthy. They also argue that the administration doesn’t have the authority to index capital gains on its own.

But conservatives back indexing capital gains and are optimistic that the administration will take action before the 2020 election. They argue that indexing capital gains will lead to a surge in sales of investments that will boost the economy and that indexing can benefit family farmers and people selling their homes.

“I think it’s going to be very helpful,” said Americans for Tax Reform President Grover Norquist.