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Democrats want a “slightly less aggressive” tax increase than President Biden’s proposal

Democrats want wealthy Americans and businesses to pay higher taxes to help raise a $ 3.5 trillion budget, including paid family vacation, childcare, and other social spending programs. is.

This is due to a proposal released by the Houseways and Means Commission on Monday. Leading groups of lawmakers have proposed raising capital gains taxes and adjusting other tax laws to collect more from wealth taxpayers, but not as dramatically as President Joe Biden’s proposed tax increase. Experts say.

Both Biden and Congressman Parliamentary democracy rank Looking at more income taxes, more capital gains taxes, and less amortization, it allows people at the top of the income ladder to reduce their tax bills.

But the Method and Means Commission’s proposal “doesn’t go as far as the Biden administration’s proposal goes,” said Steve Wamhoff, head of federal tax policy at the Left Tax and Economic Policy Institute.

The Commission’s proposal will come months after Biden announces its own proposal for a tax increase. This includes raising the highest income tax rate, raising the capital gains tax rate for millionaires, Finally, tax the “unrealized” assets of wealthy people It is passed on to the next generation without tax.

For Wamhoff, House’s proposal “has important improvements, but there are some important things left behind.” This includes Biden’s idea of ​​taxing assets that value when rich owners die. “Proposals for methods and means just skip it,” Wamhoff said.

Compared to the president’s proposal, Ways and Means’ proposal is “somewhat taxpayer-friendly” and “a little”, according to Kyle Pomerlow, a senior researcher at the American Enterprise Institute, a right-wing think tank. It’s not aggressive. “

The capital gains rate will be lower, but the wealthy will be subject to additional taxes.

Taxes on capital gains are one example. Currently, the wealthiest households face a tax rate of 20% plus a tax of 3.8% related to the Affordable Care Act.

In Biden’s plan, billionaires will pay full 43.4% of capital gains, Pommerlow said. This is the capital gains rate of 39.6% (corresponding to the increase in the income tax rate) plus the ACA-linked tax of 3.8%.

At the Ways and Means Committee proposal, millionaires pay 28.8%. This is a capital gains rate of 25% and an ACA-related rate of 3.8%. Households that earn more than $ 5 million also have a 3% additional tax, which is equivalent to a real capital gains rate of 31.8%, Pomerleau said.

Tara Thompson Popernick, Senior Vice President and Research Director of Bernstein Private Wealth Management, a wealth management company that is a subsidiary of AllianceBernstein, said:

It is important to understand what the method and means proposals offer, Pomerlo said. That’s because Congressional Democrats have to walk a tightrope to promote budget-related tax increases in the US House of Representatives and the Senate. Regarding the current budgeting process, he said, “this is a strong indication of Congress’s direction in advancing tax policy.”

Karine Jean-Pierre, White House’s chief deputy spokesman, told reporters Monday that the Houseways and Means Commission’s proposal was a “first step” and Biden would continue to work with Congress. She also said, “I’m not going to negotiate from here,” and instead “pass the process” at Capitol Hill.

The similarities and differences between Biden’s proposal and the new Ways and Means Committee’s proposal are listed below.

Return top rate to 39.6% — but if income levels are different

In 2017, then President Donald Trump signed the Tax Reduction and Employment Act. This has reduced the maximum income tax rate from 39.6% to 37%.

Both Biden and Ways and Means plans return the maximum rate to 39.6%, but start at slightly different points.Biden administration Start top rate It costs $ 509,300 for married couples and $ 452,700 for unmarried individuals. Ways and Means suggests that prices start at $ 450,000 for couples and $ 425,000 for unmarried individuals. According to the suggestion.

The Ways and Means proposal also offers an additional 3% tax on all adjusted total income above $ 5 million.

The timing of capital gains tax increases is different

The Ways and Means Committee’s plan is for wealthy households to pay more taxes on wealth, but not as much as Biden’s plan.

Biden’s proposal said that rich taxpayers should pay their stock sales and investment portfolio as much as their income. As a result, Mr Biden said a maximum income tax rate of 39.6% should also be a capital gains rate for millionaires and above.

In Ways and Means’ proposal, Popernik said that everyone who is currently paying a capital gains tax rate of 20% will pay 25%. Currently, the highest capital gains rates typically start at $ 496,600 for couples and $ 441,450 for individuals. According to the IRS..

To short-circuit the chances of wealthy taxpayers taking advantage of the preferred 20% tax before the higher tax rates come into effect, the Biden administration said the new tax rates would come into effect retroactively. April 28, 2021 The day the president officially announced his ideas to Congress.

Proposals for methods and means state that higher capital gains rates will come into effect on September 13, the official date of introduction of the bill.

In summary: “Under the transition rules, the existing statutory tax rate of 20% will continue to apply to some profits and losses in the tax year prior to the date of introduction.”

For rich people who sold stocks and other capital assets in 2021, if they sold before Monday, the previous rates would apply, Pommerlow explained.

Popernik said it was not common to advise people to rush to sell capital gains in this situation. In the next three months until the end of the year, she said, many could suddenly incur large taxes that were not previously budgeted.

More audits for wealthy taxpayers, and only for wealthy people

There is no sunlight between the president’s proposals regarding the more money the Internal Revenue Service injects to ensure that all taxpayers, especially the wealthiest taxpayers, pay full taxes.

The Commission’s proposal for new methods and means includes $ 78.9 billion to strengthen tax enforcement and update the IRS’s aging information technology system. The proposal is allocated to ensure that everyone pays the full amount, “except that the use of these funds is not intended to raise taxes for taxpayers with taxable income of less than $ 400,000.” increase.

The Biden administration has demanded $ 80 billion from government agencies. Last week, Treasury officials said investment couldn’t come fast enough because so many wealthy households were dodging taxes. 1% is responsible More than a quarter Natasha Sarin, Deputy Assistant Secretary for Economic Policy, writes about the $ 600 billion annual gap between unpaid taxes and actual taxes paid.

Aim for a Ross IRA

Biden’s plan came out without discussion about changing the new rules to a Ross IRA.

But that was before investigative journalist ProPublica posted a story that PayPal co-founder Peter Thiel managed to turn a Roth IRA. Value less than $ 2,000 To a $ 5 billion nest egg in 1999. Roth IRAs are funded after tax, so the money in them is tax-exempt at the time of distribution. (Thiel did not respond to a comment request from MarketWatch.)

According to a June article, Thiel used this account to purchase 1.7 million PayPal shares for less than a penny per share. The story caused a turmoil — and some data was dug down by the federal government. About 25,000 people According to Senate Finance Committee data, there were Ross IRAs and traditional IRAs (using pre-tax money) in 2019, with account balances between $ 5 million and $ 10 million.

The Method and Means Committee’s proposal is aimed at people who suck a lot of wealth into their retirement accounts.

In particular, the proposal limits annual contributions to IRAs or Roth IRAs if the combined retirement and defined contribution accounts (such as a 401 (k) plan) “usually exceed $ 10 million at the end of the previous period. Tax year. “

The limit applies to individuals over $ 450,000 and $ 400,000. The proposal also includes the minimum distribution required for these people.

According to Popernik, the language is undoubtedly a reaction to Thiel’s story. “If I have a very large IRA, this would feel punitive.”

Pomerleau states that it is unclear whether changes to Roth IRA rules will be the final law. But it shows that there is “at least some political pressure to do something” when it comes to IRA’s large amounts of money and assets.

Victor Reklaitis contributed to this report.

Democrats want a “slightly less aggressive” tax increase than President Biden’s proposal

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