President Biden has proposed doubling the capital gains tax rate as part of his $4 trillion spending plan. Under Biden, the top capital gains rate will be 48.8 percent after state taxes. This is more double China’s 20 percent capital gains tax rate.

The U.S. currently has a combined capital gains rate of over 29 percent inclusive of the 3.8 percent Obamacare tax and the 5.4 percent state average capital gains rate. Under Biden, this rate would approach 50 percent. This would give the U.S. a capital gains tax that is significantly higher than foreign competitors: 

OECD Simple Average: 18.4%  

OECD Weighted Average: 23.2%  

China’s Capital Gains Rate: 20%  

United States Now: 29.2% (20% + 3.8% Obamacare tax + 5.4% state average)  

United States Under Joe Biden: 48.8% (39.6% + 3.8% Obamacare tax + 5.4% state average)  

Under Biden’s plan, taxpayers in California will pay a top capital gains tax rate of 56.7 percent (39.6% + 3.8% + 13.3% California state rate = 56.7%). New Yorkers will pay a top capital gains rate of 52.2%, while New Jersey taxpayers will pay a top capital gains tax rate of 54.14%. 

Not only will Biden’s capital gains tax hike make us uncompetitive, it will also harm the economy, threaten the life savings of Americans, and could even reduce short term revenues.

Capital gains taxes act as a barrier to job creation, wage growth, and economic growth. This tax imposes double taxation on corporate income – first, businesses pay the corporate income tax on their earnings. Second, the investor pays the capital gains tax on dividends received or stocks when they are sold. This double taxation discourages savings, suppresses productivity, and discourages investment. Ultimately, this tax hike will threaten business creation, business expansion, entrepreneurship, and jobs and wages.

Biden’s capital gains tax hike could also reduce retirement savings. As part of his tax hike, Biden would double the tax rate on carried interest capital gains. This will harm private equity investors including the 165 public pension funds representing 20 million public sector workers.

Biden’s tax hikes could even reduce federal revenues in the short term. Because the tax only applies when a taxpayer sells the asset, a high capital gains rate discourages individuals from selling in order to delay having to pay the tax.  Historically, when the capital gains tax was cut, revenue increased. When the capital gains tax is low, investment increases, stock prices increase, and revenue goes up. The inverse is of course true.  

Democrats used to oppose a high capital gains tax. As recently as 2012,  Senator Chuck Schumer (D-NY) rejected doubling the capital gains tax rate to 39.6 percent. As Schumer noted: 

“Now, if you are returning the top income rate to Clinton-era levels, as I have proposed, I do think it is too much to treat capital gains the same as ordinary income,” Mr. Schumer said. “We don’t need a 39.6% rate on capital gains.”