As the 2024 election cycle gains momentum, the focus is on potential changes to capital gains taxes and how they could impact investors. Vice President Kamala Harris recently unveiled a plan to impose a 28% tax on long-term capital gains for individuals earning more than $1 million annually. This would represent an increase from the current rate of 20%. Senator Bernie Sanders has expressed a desire to go even higher than Harris’s proposal, highlighting potential divisions within the Democratic party regarding tax policy.
Harris’s proposed tax plan diverges from President Joe Biden’s vision for the 2025 fiscal year budget, which calls for a 39.6% tax rate on long-term capital gains for those earning over $1 million per year. Additionally, Biden’s plan includes an increase in the net investment income tax (NIIT) from 3.8% to 5% for high-income individuals. The potential combined rate under Harris’s plan would be 33%, while Biden’s proposal would lead to a 44.6% rate for top earners.
Former President Donald Trump, known for his broad support of tax cuts, has not outlined a specific proposal regarding capital gains taxes. However, he has been connected to Project 2025, which advocates for a 15% tax rate on capital gains and dividends while doing away with the NIIT. Trump’s campaign has not provided any comments on the matter, leaving uncertainty about his stance on capital gains tax rates.
Over the years, capital gains tax rates have generally been lower than ordinary income tax rates. If Harris’s 33% combined rate for capital gains were to be implemented, it would mark the highest rate since 1978, when the rate was approximately 40%. The proposed 28% rate by Harris mirrors the rate set by President Ronald Reagan in 1986, which was aligned with ordinary income tax rates at the time. Following tax cuts during George W. Bush’s presidency, the capital gains tax rate dropped to 15%, the lowest since the Great Depression.
Capital gains tax revenue tends to be more volatile than regular income tax collections due to its dependency on when investors choose to realize profits. This volatility creates uncertainty for policymakers when estimating potential revenue from changes in tax rates. Moreover, higher capital gains tax rates may lead investors to delay selling assets, known as the “lock-in effect”, or prompt them to strategically realize gains in lower tax brackets.
In the year 2024, investors could face a range of tax rates on capital gains, including 0%, 15%, and 20%, in addition to the 3.8% NIIT for higher-income individuals. The decision on when to sell assets and incur capital gains taxes will depend on individual circumstances and long-term financial objectives. As the tax debate continues to unfold, experts anticipate shifts in investor behavior based on the prevailing tax environment.
The proposed capital gains tax changes from various political figures present contrasting visions for how investment income should be treated in the coming years. As the election progresses, investors and policymakers will closely monitor these proposals and their potential impacts on the economy and financial markets. It remains to be seen how these tax policies will evolve and what implications they may have for individuals at different income levels.