Kamala Harris Pares Back Biden’s Capital-Gains Tax Proposal
Advisers believe a more modest increase would balance taxing wealthy households and encouraging investment
WASHINGTON—Democratic presidential nominee Kamala Harris proposed a less drastic increase in the top capital-gains tax rate on Wednesday, breaking with a plan President Biden outlined in his budget blueprint earlier this year.
“We will tax capital gains at a rate that rewards investment in America’s innovators, founders and small businesses,” she said in a speech at a New Hampshire brewery, detailing her plan to promote small businesses.
The all-in top rate would be 33%, which would include a new 28% capital rate cited by Harris on Wednesday as well as Biden’s proposal to raise a 3.8% investment income tax to 5%, people familiar with the plan said. Biden, by contrast, wanted a near-doubling of today’s 23.8% top rate to 44.6%, taxing capital gains at roughly the same rate as ordinary income.
The break from Biden on the capital-gains tax rate—the clearest effort yet from her campaign to distance herself from the president—comes days before her debate with former President Donald Trump, who has tried to tie her to Biden’s economic policies and attacked her for being too far to the left.
Her advisers believe the Biden proposal puts the rate too high and a more modest rate increase could better encourage investment in entrepreneurship and access to capital for small businesses, the people said. Harris’s allies argue the latest proposal still aligns with Harris’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.
Even at 33%, the all-in top capital-gains rate would be the highest since 1978. Any plan would require congressional approval, and that could be difficult, even if the Democrats control the House, Senate and White House next year.
Earlier in the campaign, Harris aides had signaled that she was in favor of the full $5 trillion of tax increases outlined in Biden’s most recent budget. Dialing 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%—20% plus a 3.8% tax on investment income. It’s owed only when taxpayers sell assets, or realize gains, and unrealized gains escape the income tax if passed to heirs.
The Biden budget would make several changes to those rules. It would tax unrealized gains at death above a $5 million per person exclusion and tax unrealized gains during life for people with a net worth over $100 million. Harris’s rate change doesn’t necessarily alter her approach to those structural changes or break with Biden on those policies.
The Biden budget would tax capital gains at ordinary income rates—which Democrats want to raise to 39.6% from 37%—for households with taxable income over $1 million. The Biden budget also would increase that 3.8% investment income tax to 5%, making the all-in rate 44.6%—and the top rate would have been over 50% in some states.
In recent weeks, Harris has focused on explaining her economic vision for the country, pitching herself to voters as an advocate for the middle class and small businesses. Harris has repeatedly acknowledged that prices under the current administration have remained too high and centered her message on lowering costs for families.
Harris also proposed in her speech Wednesday a 10-fold expansion of a tax deduction for new small businesses and announced a goal of 25 million new small-business applications in her first term if elected president.
“I believe America’s small businesses are an essential foundation to our entire economy,” Harris said, adding that if elected, strengthening small businesses would be one of her “highest priorities.”
As part of her new proposal, Harris said she would expand the startup-expense deduction for small businesses to $50,000. Currently, business owners can deduct up to $5,000 in startup expenses—costs they incur for items such as market surveys, advertisements and salaries for workers in training even before the business officially begins operating.
Harris has been criticized for changing her policy views on issues like fracking for political expediency. Those close to the vice president argue she is a pragmatic politician who is open to changing policy specifics as long as she agrees with the end goal.
“My values have not changed,” Harris said in a recent interview with CNN when asked about her shifting policy views.
The U.S. 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 over relatively long holding periods.
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 push 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.
Capital gains are particularly concentrated at the top of the income scale. The Tax Policy Center estimates that the top 0.1% of households receive more than half of long-term capital gains.
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.