Rich Americans can avoid paying up to 90% of President Joe Biden’s proposed capital gains tax increase, CBS News reports.
Biden has proposed a plan that would nearly double taxes on investment income for the top 1% from 20% to 39%.
The move is intended to bring the average investment tax up to the same levels as the 37% tax rate paid by top earners.
"It's time for corporate America and the wealthiest 1% of Americans to just begin to pay their fair share," Biden said a speech to Congress on Wednesday. "We're going to get rid of the loopholes that allow Americans who make more than a million dollars a year and pay a lower tax rate on their capital gains than Americans who receive a paycheck."
The hike would fund part of Biden’s American Families Plan, which includes universal pre-K, free community college tuition, and other programs.
Tax would hit few people:
Biden’s tax hike would only apply to those earning over $1 million. Researchers say the plan could raise $1 trillion but a study from the Wharton Business School at the University of Pennsylvania estimated that the rich could dodge taxes on 90% of that figure.
"We don't think that the proposal has a lot of teeth," John Ricco, director of policy analysis at the Penn Wharton Budget Model, told CBS News. "There are a lot of games you can play to avoid paying this tax."
Because the increase is temporary, and the tax is only paid when investors sell their stakes, shareholders can simply wait until the tax expires to sell.
The study said the rich can also lower their taxable total by including losses elsewhere in their portfolio.
Some shareholders can also minimize how much they sell in any given year to lower their tax burden.
"Capital gains is a discretionary tax," Ricco said. "It is not like taxes you pay on income. You get to decide when you sell your investments, and therefore when you pay taxes or not."
No tax on inherited income:
Biden has not proposed raising the estate tax and there is no capital gains tax on inherited income.
That means that the capital gains tax hike would not apply to investments that are inherited.
But even if Democrats close the loophole in their proposal, the Wharton study estimated the rich would pay only $113 billion in additional taxes over the next 10 years.
Ricco said the move would help cut into the country’s economic inequality but falls short of the funding goal.
"There are plenty of reasons why you would want to have capital gains taxed at the same rate of income, but raising revenue is not one of them," he said.
