President Joe Biden sparked controversy in late April by unveiling plans to significantly increase capital gains taxes and introduce a tax on unrealized gains. The proposed changes include a capital gains tax rate that could reach 44.6%, the highest in history, surpassing the 40% rate under President Jimmy Carter in the late 1970s.
The plan primarily targets high-net-worth individuals, with the unrealized gains tax affecting only those with wealth exceeding $100 million.
The announcement prompted a study by American University to assess the plan’s potential effects. The study found that the impacts are likely to be generally positive, given that wealth inequality in the United States means only a small portion of the population would be affected. The tax hike aims to address the upward wealth redistribution that has occurred since the 2008 financial crisis, with a significant shift of wealth from the bottom 90% to the top 1% during the COVID-19 pandemic.
The research concluded that the tax hike could lead to stronger economic growth, increasing gross domestic product (GDP) by 1% and government revenue by about 5%.
Another potential effect of Biden’s proposed tax policy is reducing America’s growing public debt. In 2023, the U.S. government spent approximately $6.3 trillion, with revenues of about $4.44 trillion. Had the Biden tax plan been in effect, the deficit could have been reduced by $220 billion, according to the study’s estimates.
While this figure might seem small compared to the federal debt, which exceeded $34 trillion at the end of 2023, and the borrowing rate of $1 trillion every 100 days, the policy could have compounding effects. It could slow the rate of borrowing and fund projects and programs that promote economic growth, potentially outpacing debt accumulation.
