President Joe Biden will propose almost doubling the capital gains tax rate for wealthy individuals to 39.6 per cent, which, coupled with an existing surtax on investment income, means that federal tax rates for investors could be as high as 43.4 per cent, according to people familiar with the proposal.

The plan would boost the capital gains rate to 39.6 per cent for those earning US$1 million or more, an increase from the current base rate of 20 per cent, the people said on the condition of anonymity because the plan is not yet public. A 3.8 per cent tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than the top rate on wage and salary income, they said.

Stocks slid on news about the plan, with the S&P 500 Index down 0.7 per cent as of 1:43 p.m. after climbing 0.2 per cent earlier. The Nasdaq Composite fell 0.6 per cent after rising as much as 0.5 per cent. Ten-year Treasury yields erased gains.

The proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labor. Biden campaigned on equalizing the capital gains and income tax rates for wealthy individuals, saying it’s unfair that many of them pay lower rates than middle-class workers.

The White House didn’t immediately respond to a request for comment, and the Treasury Department declined to comment. Biden is expected to release the proposal next week as part of the tax increases to fund social spending in the forthcoming “American Families Plan.”

That proposal, expected at around US$1 trillion, will come as Congress debates how to proceed on Biden’s separate US$2.25 trillion infrastructure-focused package known as the American Jobs Plan, which would be funded by tax increases on corporations. It also follows the US$1.9 trillion coronavirus-relief bill passed in March.

The families plan is set to include a wave of new spending on children and education, including a temporary extension of an expanded child tax credit that would give parents up to US$300 a month for young children or US$250 for those six and older.

The capital gains increase would raise US$370 billion over a decade, according to an estimate from the Urban-Brookings Tax Policy Center based on Biden’s campaign platform.

State Levies

For US$1 million earners in high-tax states, rates on capital gains could be above 50 per cent. For New Yorkers, the combined state and federal capital gains rate could be as high as 52.22 per cent. For Californians, it could be 56.7 per cent.

Democrats have said current capital gains rates largely help top earners who get their income through investments rather than in the form of wages, resulting in lower tax rates for wealthy people than those they employ. Republicans argue that the current framework encourages saving and promote future economic growth.

Capital gains taxes are paid when an asset is sold, and are applied to the amount of appreciation on the asset from when it was bought to when it is sold.

Congressional Democrats have separately proposed a series of changes to capital-gains taxation, including imposing the levies annually instead of when they are sold.