Much divides leading Democrats on tax policy, both on the presidential campaign trail and on Capitol Hill. They disagree over whether to impose a wealth tax, on how much to tax high earners and on whether to raise taxes on the middle class in order to pay for a “Medicare for all” health care program.
But on one key theme, the leading presidential contenders and top Democrats in the Senate and House agree: If their party retakes the presidency and full control of Congress after the November election, wealthier people are likely to be paying higher taxes on their investment income.
How high those taxes would go, and how many Americans would need to pay them, would depend heavily on which Democrat won the White House.
In recent decades, relatively low taxes on capital gains have contributed to widening inequality, by allowing wealthy Americans who draw substantial income from such profits to pay lower effective federal tax rates than some workers who earn far less money entirely through their labor. In effect, the difference in rates helps the rich get richer, because their invested wealth can grow faster over time.
Every top Democratic presidential candidate proposes to raise trillions of dollars in new tax revenue over a decade from corporations and the rich. The amount varies widely among them, however.
For example, former Vice President Joseph R. Biden Jr. has proposed just under $4 trillion in new taxes, while Senator Bernie Sanders of Vermont advocates spending plans that will require an estimated $50 trillion, or more, in new revenue.
Mr. Sanders and Senator Elizabeth Warren of Massachusetts have both proposed versions of a wealth tax, which annually taxes Americans with high net worth, on the assets they hold. Mr. Biden does not support a wealth tax.
Legal scholars have raised questions about its constitutionality, and Democratic aides on Capitol Hill say the idea does not have the support of enough senators to pass Congress in the next term, even if Democrats won the presidency and the Senate.
Instead, those aides point to proposals to tax capital gains as common denominators among the leading Democratic candidates that often overlap with the priorities of the top Democrat on the Senate Finance Committee, Ron Wyden of Oregon.
More than one-fifth of all income for the top 1 percent of earners in America comes from capital gains, according to estimates by the Congressional Budget Office.
“It’s really not an issue of billionaires sit on piles of cash, of idle money that the government should take,” said Gabriel Zucman, an economist at the University of California, Berkeley. “It’s really an issue of you have people who have capacity to pay a lot of taxes” — and the way to get them to pay more is by taxing capital.
The need for more tax revenue is clear to many Democrats who want to fund government programs meant to help the poor and the middle class, including universal child care, paid leave, early-childhood education and free college.
But the United States taxes income from capital gains at a lower rate than it taxes income from jobs. Orthodox free-market economists argue that comparatively lower taxes on capital gains stimulate investment, and conservatives warn that raising those taxes would hamper economic growth.
“Right now, one of the biggest problems we have is low investment even with low interest rates,” said Karl Smith, vice president for federal policy at the Tax Foundation in Washington, a think tank that tends to support lower taxes on businesses and capital gains. “In general, taxing capital or productive assets is going to make that problem even worse.”
Mr. Biden and Mr. Sanders, along with Ms. Warren, favor raising the tax rate for capital gains, such as profit on the sale of a stock or a business, to the same rate as taxes on labor income. Mr. Biden’s increases would be smaller, and apply to fewer Americans, than Mr. Sanders’s or Ms. Warren’s.
Currently, married taxpayers earning up to just under $80,000 a year pay no taxes on capital gains from assets held longer than a year. The top rate, for those earning just under $500,000 a year, is 23.8 percent, compared with a top rate of 37 percent for labor income.
President Trump’s 2017 tax cuts reduced the top rate on labor income from 39.6 percent, but they did not change capital gains rates. Mr. Trump has considered reducing taxes on certain investment income as part of a still-in-progress package of tax proposals for his re-election bid.
Mr. Biden would raise the top income and capital gains rates to 43.4 percent, for Americans earning $1 million or more annually.
Mr. Sanders would raise capital gains rates in steps for Americans earning $250,000 a year or more. The rate would be 40 percent for Americans earning between $250,000 and $500,000. For those earning above $10 million, the top rate would be nearly 60 percent. Ms. Warren would also set a top capital gains rate of nearly 60 percent, for individual taxpayers earning more than $250,000 a year.
All three candidates would also end a provision that reduces taxes for the heirs of very wealthy Americans who are subject to the estate tax upon death. If a rich man buys a vacation home for $1 million, but its value grows over decades to $11 million, he typically owes capital gains taxes on the profit of $10 million if he ever sells the home. But if he instead passes the home onto his daughter and she sells the home for $11 million, she owes no taxes at all because the home’s value is reset for tax purposes, or stepped up, to what it is worth at the time of the father’s death.
That provision effectively allows wealthy families to avoid some taxes by holding assets — which are not taxed until they are sold — until they are eligible for the “step up” in value.
Mr. Wyden calls the step-up benefit, and the fact that assets are taxed only when they are sold and not as they appreciate in value, “loopholes” that wealthy Americans exploit to reduce their tax bills.
“These folks to a great extent just get to pay what they want, when they want to, and often hardly anything at all,” he said in an interview. In meetings with constituents, he added, they tell him: “When you talk about new taxes, you should make sure people pay what they owe. Close the loopholes first.”
Mr. Wyden’s own tax plan, released last fall, would require annual tax payments from high earners whose assets appreciate in value — for example, when their stock or bond portfolios gain value. It would equalize tax rates for labor and capital gains income at a level that has yet to be determined — his plan seeks input on the top rate for both — and it would minimize the tax benefits of holding assets that have appreciated in value until death.
It would apply to a group of taxpayers who look more like those in Mr. Biden’s proposal than in Mr. Sanders’s or Ms. Warren’s, and includes exemptions for family farms and retirement accounts up to several million dollars. Mr. Wyden’s approach would raise an estimated $1.5 trillion to $2 trillion over a decade.
As president, Mr. Sanders or Ms. Warren could push for a more aggressive version of the proposal. But for Americans trying to guess where new capital taxes could fall under a Democratic administration, the Wyden plan is probably a good place to start.
