Rich Americans would dodge Biden's proposed capital gains tax hike, study says

President Biden has called for nearly doubling the capital gains tax rate in order to fund his ambitious $1.8 trillion spending proposal, but a new analysis suggests that 90% of wealthy investors would sidestep the higher levy. 

Under the American Families Plan, released Wednesday, the top capital gains tax would climb to 39.6% from 20% for Americans earning more than $1 million, or roughly 500,000 households. The president plans to keep an existing Medicare surcharge in place, bringing federal tax rates as high as 43.4% for some Americans.

But a new analysis by the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania's Wharton School, suggests that rich Americans would employ techniques to avoid the rate increase. Tax avoidance, most of it legal, would cut about $900 billion of the estimated $1 trillion that a capital gains tax increase could generate for the federal government over the next decade, the researchers said.

BIDEN'S PLANNED CAPITALS GAINS TAX HIKE COULD SLASH US REVENUE BY $33B

The president also wants to eliminate the so-called stepped-up basis. Under current law, when heirs inherit an asset that has appreciated in value, they get a "step-up" in basis, meaning they receive the holding at its current market value. Beneficiaries can sell those assets and pay capital gains based only on the time they receive the asset and the time they sold it, allowing them to minimize the tax bite. The first $1 million of gains would be exempt from the end of the stepped-up basis, and there would be no tax if the gains are used for charitable donations.

But even if Biden eliminates the stepped-up basis, the wealthy will find other tactics to reduce their tax liability, according to the Penn Wharton researchers.

WHAT BIDEN'S CAPITAL GAINS TAX PROPOSAL COULD MEAN FOR YOUR WALLET

"Even with stepped-up basis eliminated, several avenues for tax avoidance remain," the researchers wrote. 

For instance, they said, taxpayers would likely realize more gains in years when taxable incomes fall below the threshold. They also suggested that an increased share of business incomes would be organized via pass-through interests instead of C-corporations in order to avoid the second layer of shareholder tax.

"A large body of empirical research shows that when taxes on capital gains increase, realizations of capital gains fall," the researchers wrote. "Compared with other forms of income taxed under the individual income tax, capital gains are relatively responsive, or elastic, with respect to tax rates."

Taxes on long-term capital gains – generally classified as an asset that's held for more than one year – currently range from 0% to 20%, depending on a person's income. Wealthier investors are also subject to an additional 3.8% tax on long- and short-term capital gains that's used to fund ObamaCare. Short-term capital gains on assets sold within a year are typically taxed as ordinary income.

GET FOX BUSINESS ON THE GO BY CLICKING HERE

Capital gains are taxed favorably when compared to wage and salary income; under existing law, the richest Americans pay a top tax rate of 37% on ordinary income, while the top tax rate on capital gains is 23.8%.

But Biden is seeking to reverse a long-standing provision of the tax code that imposes substantially lower rates on successful investments than ordinary income.

The president campaigned on equalizing the capital gains and income tax rates for rich Americans.