Kamala Harris to pare back Biden’s capital-gains tax proposal

Kamala Harris is planning to propose a less drastic increase in the top capital-gains tax rate, breaking with a plan Joe Biden outlined in his budget blueprint earlier this year.

Kamala Harris at a campaign rally in North Hampton, New Hampshire. Picture: Getty Images via AFP.

Democratic presidential nominee Kamala Harris is planning to propose a less drastic increase in the top capital-gains tax rate, breaking with a plan President Biden outlined in his budget blueprint earlier this year, according to people familiar with the matter.

Ms Harris’s advisers have been discussing the move behind the scenes in recent days, the people said. The vice president is set to speak Wednesday afternoon local time in New Hampshire about promoting small businesses, but it couldn’t be determined whether she will discuss the capital-gains proposal in those remarks.

The top rate under discussion is 28 per cent but could change, the people said. Biden wanted a near doubling of the all-in top capital-gains rate to reach 44.6 per cent – the same 39.6 per cent top rate he wants for ordinary income plus a 5 per cent investment-income tax. Reporting couldn’t determine whether Ms Harris’s 28 per cent would include that additional levy.

A Harris campaign spokesman declined to comment.

Ms Harris’s advisers believe that the Biden proposal puts the rate too high and that a more-modest rate increase could better encourage investment in entrepreneurship and access to capital for small businesses, the people said. Ms Harris’s allies argue the latest proposal still aligns with the vice president’s plan for the wealthy and corporations to pay more in taxes, with her advisers viewing it as a more appropriate balance, the people said.

Earlier in the campaign, Harris aides had signalled that she was in favour of the full $5 trillion of tax increases outlined in Biden’s most recent budget. Dialling back the capital-gains tax rate increase would mean less money available to pay for her agenda.

Under current law, the top long-term capital-gains rate is 23.8 per cent – 20 per cent plus a 3.8 per cent tax on investment income. It is owed only when taxpayers sell assets, or realise gains, and unrealised gains escape the income tax if passed to heirs.

The Biden budget would make several changes to those rules. It would tax unrealised gains at death above a $5 million per person exclusion and tax unrealised gains during life for people with a net worth of more than $100 million.

The Biden budget would tax capital gains at ordinary income rates – which Democrats want to raise to 39.6 per cent from 37 per cent – for households with taxable income over $1 million. They also want to increase that 3.8 per cent investment-income tax to 5 per cent, making the all-in rate 44.6 per cent.

The updated Harris proposal would still keep that $1 million threshold but set a lower top tax rate, the people said.

The US has usually set capital-gains tax rates below ordinary-income rates for several reasons: to encourage investment and to adjust for the fact that some taxed gains are due to inflation.

And, because taxpayers can escape the income tax by holding assets until death, higher capital-gains rates can just discourage people from selling – for the rest of their lifetimes or until a new Congress comes along and cuts the rate. Without structural changes, just raising the capital-gains rate by more than a few points could actually reduce federal revenue.

But in recent years, Democrats have pushed to raise the capital-gains tax and to change the basic rules, as part of their effort to impose higher taxes on the wealthiest households. The idea of taxing wealth the same as work carries significant weight in Democratic circles and led to Biden’s proposals, which officials have refined.

The Biden changes are designed to work together. By changing the tax treatment of capital gains at death, the rate can go higher and still raise revenue.

In her speech, Ms Harris will propose a 10-fold expansion of a tax deduction for new small businesses and announce a goal of 25 million new small-business applications in her first term if elected president, according to campaign officials.

As part of her new proposal, Ms Harris would expand the start-up-expense deduction for small businesses to $50,000. Currently, business owners can deduct up to $5,000 in start-up expenses, or costs they incur for items such as market surveys, advertisements and salaries for workers in training even before the business officially begins operating.

Dow Jones